As a general rule most property investors have already purchased a home over which they still have a home loan. This loan is on a principal and interest basis and most cif not all financial planners will advise you to pay of your home loan as quickly as possible because the interest you pay on it is not deductible. Quite often, property investors in the market for the first time, when looking for an investment loan simply go for an investment loan product that is much the same as their home loan. This is ot a tax efficient structure for an investment loan.

This standard or basic investment loan will generally be for a 25 – 30 year term and unless you determine otherwise will be on a principal and interest basis. It is imperative, that while ever you have home loan debt or want to make a personal purchase, you include an interest only period of 5 or maybe 10 years in your investment loan. By doing this you pay the minimum amount to your investment loan, all of which is tax deductible, and you use as much of your personal income to make extra repayments on your home loan. This way you pay off your home loan much quicker and maintain your negative gearing benefits on your investment loan as you do so (by not reducing the principal amount of your investment loan.) If you were to pay interest only on your investment loan and make an additional $100 repayment each month to your 30 year term home loan (at say 6.99% p.a.) you will reduce your loan term by almost 5 years and at the same time save yourself $66000+ in interest.

Another critical feature to include in your investment loan is a capitalising line of credit. Most investors subsidise the interest shortfall on their investment loan from their personal salary. Let’s say an investor is contributing $500 per month from his personal salary to meet the shortfall in interest that is due on his investment loan. If instead he capitalised this $500 shortfall so that it was simply added to the overall investment borrowings and used the surplus $500 per month he now has in his own hands to make an additional repayment to his home loan, then he would reduce the home loan term from 30 to 16 years and save himself $180,000 in non-deductible interest! The ATO has issued a favourable Private Ruling not so long ago that confirms that a taxpayer with an investment loan and a capitalising line of credit that is utilised to meet any shortfall on the investment loan interest or other deductible costs attached to the investment, is able to claim the capitalised interest that accrues under the line of credit as a deductible expense.

I hope this explains how important it is to negotiate the right investment loan for your investment acquisitions. To simply go for a standard vanilla product may seem easy but it will cost you thousands of dollars over the long term.