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Untagged	10 Dec 2009 4:30 PM
Are you ready to take out an investment loan? by KimJ

fffMore people these days are look to take out an Investment Loan to buy investment property or shares. Here we look at some of the things you need to consider when you borrow to invest.

Your priority should be your Home Mortgage – is this really the case?

Your home is a big investment and it's costing you a lot in interest. Most financial planners will recommend that borrowers should aim to pay down their non—deductible home loan debt before they repay their home loan debt. This does not mean that you should necessarily repay your home loan in full before looking at investment opportunities. Rather than letting good investment possibilities pass you by it is better to utilise the equity you have created in your home by borrowing against it (by creating a separate investment loan account) to provide the balance of money required to settle your investment purchase. Certainly while ever you have only a home loan you should apply as much of your income as possible to repay this faster and create equity which you can use in the future to launch yourself into an investment.

Investment Loan for investment property

If you've reduced or paid off the Mortgage on your home, you might consider borrowing against the home security to buy an investment property. You can borrow up to 80% without the additional cost of mortgage insurance against your home. Some of this investment loan borrowing can go towards the purchase price of an investment property with some of it being put aside to help with servicing the interest on your investment loan (rather than paying any interest shortfall on the investment loan with your own personal income.) By doing this more of your personal income can be applied to making additional repayments on your home loan debt. An Investment Loan differs from a Home Loan in a couple of key ways.

Investment Loans & Home Loans - the differences

In contrast to a home loan, costs associated with an investment loan are tax deductible (eg interest, repairs, rates, depreciation, etc). Of course, any rental income will generally increase your taxable income.

Capital gain on an investment property is taxable

There is another key way in which investment properties differ from residential homes. While the capital gain on your home isn't taxed, any appreciation in the value of an investment property will be.

Negative gearing - short-term loss for long-term gain

If you earn less from an investment property than it's costing you, you are “negatively geared”. While everyone would prefer their investments to be positively geared, tax laws in Australia recognize that if investment in residential property and shares is to be encouraged investors must be able to claim back any costs (over and above the income that the investment property generates) as a deduction against their personal income. For this reason investors are generally willing to accept a short-term loss in the hope of a capital gain later. It is generally accepted that the residential market in Australia generates a lower return than some other investments but history shows that it also provides a greater opportunity for capital gains.

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