This investment loan covers all the bases and is looking better as interest rates drop in Australia For the first time in a long time we have seen the RBA drop interest rates and the investor who has been subsidising the shortfall of interest on his or her investment loan and has been seeing negative returns on residential property for a long time is feeling happier.

Unlike the share market which has been decimated through the recent credit crisis, the direct property investor has seen property values hold up reasonably well across Australia – gearing through an investment loan has paid off . There is little doubt that some cities in some States might now see a slight decline in property values but both Darwin and Sydney appear to still have room for growth. Darwin has experienced huge growth as a result of the mining boom and a shortage of accommodation for staff there. Taking an investment loan has been a worthwhile exercise here. While some argue that there may be less demand for Australian resources over the coming years, others maintain that India and China will continue to import iron ore and steel because they simply have to meet the infrastructure and accommodation demands of a burgeoning population. For this reason Darwin and the surrounding areas are considered to still have room for increased prices and investors in the area have been funding purchases through an investment loan that has some special features. Property prices in Sydney are also likely to increase because demand outstrips supply and again we have seen some excellent investment loan product on the market.

When an investor is in the market for an investment loan he should ensure that the investment loan he negotiates suits not just his immediate purpose but also can take him forward when further investment is contemplated. For this reason

1. your investment loan should be able to be split into more than one account.
2. your investment loan should enable you to label each new account separately for easy identification at tax time.
3. your investment loan should not be “mixed” with any home loan or other personal loan debt. There are tax implications if your investment loan is included within your home mortgage. Check ATO website.
4. your investment loan should be interest only for at least the first 5 years 5. your investment loan should include a capitalising line of credit.
6. where a couple is purchasing and only one is working or one is likely not to be working in the future then your investment loan should be taken out in the nale of the main and long term income earner to maximise tax deductions.

The capitalising interest feature in an investment loan is important especially in current times of uncertainty. A recent Private Ruling by the ATO considers the deductibility of capitalised interest in an investment loan under which the investor capitalises the shortfall between the income earned on his investment property and the interest due on his investment loan. Instead of subsidising the shortfall with his personal income, under this investment loan the investor capitalised the shortfall on the line of credit. He used his personal income to pay off his non-deductible home loan debt faster. This is a much more tax efficient use of funds. The ATO confirmed in this Private Ruling that the additional capitalised interest was deductible. When you are considering an investment loan make sure you negotiate one that gives you flexibility including the ability to capitalise interest should you decided to do so.