Mortgage discharge expenses are the costs involved in discharging a mortgage other than payments of principal and interest. These costs are deductible in the year they are incurred to the extent that you took out the mortgage as security for the repayment of money you borrowed to use to produce assessable income.
For example, if you used a property to produce rental income for half the time you held it and as a holiday home for the other half of the time, 50% of the costs of discharging the mortgage are deductible.
Mortgage discharge expenses may also include penalty interest payments. Penalty interest payments are amounts paid to a lender, such as a bank, to agree to accept early repayment of a loan – including a loan on a rental property. The amounts are commonly calculated by reference to the number of months interest payments would have been made had the premature repayment not been made.
Penalty interest payments relating to a rental property are deductible:
- if the loan moneys borrowed are secured by a mortgage over the property and the payment effects the discharge of the mortgage, or
- if payment is made in order to rid the taxpayer of a recurring obligation to pay interest on the loan.