| mortgage, investment loan, first home buyer, debt consolidation | 29 Oct 2008 11:00 PM |
| Do not under estimate the importance of structure when negotiating your investment loan by Vicky Edema | |
Many investors when they are considering the purchase of an investment property fail to ensure that the structure of any investment loan that they enter is correct, particularly for tax purposes. Borrowers simply approach their existing lender and ask for an investment loan. The lender invariably looks to their home loan and taken there is sufficient equity might suggest that the borrower increase that loan by the purchase price as opposed to restructuring it to separate the investment loan from the home loan debt or taking out a new investment loan altogether.
The reality is that most investors do utilise the equity in their home property to assist in the purchase of an investment property. As a result it often seems convenient to just wrap the investment loan in with the home loan by way of a simple variation of the home loan mortgage. While convenient, such an approach when setting up your investment loan will cost you significant dollars in the long term.
The most important issue for investors when negotiating their investment loan is to ensure that it is not “mixed” with any home loan or personal loan debt. Should you mix your investment loan with other personal debt and subsequently be in a position to make an additional repayment of principal, rather than apply the total additional repayment to reduce the home loan debt, the ATO will require that you apportion that reduction between your home loan and your investment loan. As a result rather than reducing your non-deductible home loan by the maximum amount possible, you are forced to apply money to reduce your deductible investment loan. Always ensure that any investment loan is clearly identified as separate to your home loan. The investment loan can be set up as a separate account to the home loan within one mortgage or negotiated as a separate loan altogether. By separating your investment loan from other debt you will:
1. save costs at accounting time because interest expense is easily identified
2. be able to apply any additional repayments in total to you7r home loan debt.
When negotiating your investment loan, particularly when you have home loan debt as well, you should always take the investment loan on an interest only basis. Again this ensures that you maximise your negative gearing benefits rather than having them reduce each year as you reduce the principal amount of your investment loan. Most interest only loans today allow you to make extra repayments of principal if you wish to but while ever you have surplus cash you are probably better to save this for future personal expenses as opposed to reducing the amount of deductible investment loan interest by repaying principal sums on your investment loan.
A third consideration, taken you have equity in other property, is to include a line of credit in your investment loan structure. This provides you with a buffer for unexpected costs in relation to your investment property and in recent Private Rulings by the ATO it appears that you can also draw on this to meet any shortfall between your investment income and your investment outgoings. By utilising the investment loan line of credit to meet these shortfalls, you have a surplus in your salary which you can instead apply to repay your home loan debt. In addition if the line of credit within your investment loan structure includes a capitalising feature then you also increase your negative gearing benefits.
The reality is that most investors do utilise the equity in their home property to assist in the purchase of an investment property. As a result it often seems convenient to just wrap the investment loan in with the home loan by way of a simple variation of the home loan mortgage. While convenient, such an approach when setting up your investment loan will cost you significant dollars in the long term.
The most important issue for investors when negotiating their investment loan is to ensure that it is not “mixed” with any home loan or personal loan debt. Should you mix your investment loan with other personal debt and subsequently be in a position to make an additional repayment of principal, rather than apply the total additional repayment to reduce the home loan debt, the ATO will require that you apportion that reduction between your home loan and your investment loan. As a result rather than reducing your non-deductible home loan by the maximum amount possible, you are forced to apply money to reduce your deductible investment loan. Always ensure that any investment loan is clearly identified as separate to your home loan. The investment loan can be set up as a separate account to the home loan within one mortgage or negotiated as a separate loan altogether. By separating your investment loan from other debt you will:
1. save costs at accounting time because interest expense is easily identified
2. be able to apply any additional repayments in total to you7r home loan debt.
When negotiating your investment loan, particularly when you have home loan debt as well, you should always take the investment loan on an interest only basis. Again this ensures that you maximise your negative gearing benefits rather than having them reduce each year as you reduce the principal amount of your investment loan. Most interest only loans today allow you to make extra repayments of principal if you wish to but while ever you have surplus cash you are probably better to save this for future personal expenses as opposed to reducing the amount of deductible investment loan interest by repaying principal sums on your investment loan.
A third consideration, taken you have equity in other property, is to include a line of credit in your investment loan structure. This provides you with a buffer for unexpected costs in relation to your investment property and in recent Private Rulings by the ATO it appears that you can also draw on this to meet any shortfall between your investment income and your investment outgoings. By utilising the investment loan line of credit to meet these shortfalls, you have a surplus in your salary which you can instead apply to repay your home loan debt. In addition if the line of credit within your investment loan structure includes a capitalising feature then you also increase your negative gearing benefits.
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