Smart Investment Loans
Property investment in Australia is gaining momentum again as the economic outlook improves. Unemployment figures peaked in late 2009 during the GFC but job opportunities are now more readily available and the economic outlook (while still a little uncertain) seems to be slowly improving.
Along with a positive economic outlook, a continuing shortage of residential property in many of Australia's capital cities, interest rates are around 5.75% p.a. to 6% p.a. range (as low as the baby-boomers have ever seen them) and this also favours property investment.
If you are aiming to enter the market, then there are a number of matters you should consider, and top of the list is a well-featured investment loan that allows you flexibility.
Naturally most investors seek to have an interest-only period within their investment loan. Traditionally the interest only period in an investment loan has been 3 or 5 years but now some lenders will offer up to 10 years interest-only on an investment loan. This may be a term investment loan or a line of credit facility but either way the increased interest only period is a bonus for investors.
The positives of an interest-only loan include the fact you are not having to repay capital which results in your reducing your loan, reducing your interest and ultimately your negative-gearing benefits. In fact, when your investment loan is on interest-only terms, this means you can either reduce your non-deductible home loan debt or personal debt where you will not receive tax benefits. You can also use what you save for personal use, rather than putting significant personal purchases on a credit card (with a very high rate of interest).
Another important feature of an investment loan is a one that allows you to capitalise interest. There was some controversy over the deductibility of captalised interest in the late 1990s and ultimately a loan structure known as Wealth Optimiser was deemed to be contrived for Part IVA tax avoidance purposes. The ATO subsequently issued a ruling denying deductibility of capitalised interest where borrowers have their home and investment loans with one lender and are applying rental income to the repayment of home loan debt and borrowing the total investment loan monthly interest payment - which would otherwise have been covered - at least to some extent - by the rental income.
Despite this ruling it is considered unlikely that the ATO would challenge a situation where a taxpayer chose to borrow the shortfall between rental income, costs and on-going maintenance outlays on the investment property as opposed to subsidising this shortfall from personal income. As an investor with personal debt or a personal savings plan, it is far better to borrow the shortfall cost on investment loans /property as opposed to paying them from your own personal income.