Structuring your investment property loans
Some property investors have learnt the hard way that getting your loan structure wrong can cost you money and a lot of trouble.
If you go directly to the bank they often have policies that dictate that the default option is what is best of r the bank (no surprise there) which often happens to be not the best for you the borrower.
Property investors often sign up to a loan without thinking about (and without being told about but the bank and even some mortgage brokers) the future negative consequences of what they are doing.
By having a mortgage broker who understands investment property loan structuring to help you setup your loans from the start can save you the time and money of unravelling a sub-optimal loan structure.
Interest rates, fees, tax payable (or deductible) and flexibility are all influenced on your investment property loan structure. Having the wrong loan structure can mean that you pay more interest, fees and cannot easily change what you are doing without paying these fees and charges. It can also mean that your financial situation is controlled by the bank or lender, and how can you put a price on that?
Neglecting to consider tax and tax deductibility in your investment property loan structure can cost you a significant amount of money, potentially thousands of dollars.
Australia currently have negative gearing laws that allow you to claim ‘losses’ on your investment property on tax. In most situations, these negative gearing rules to not currently apply to your owner occupier home.
Your loan structure should consider minimising non-tax deductible costs. Paying down tax deductible debt when this money could be used to pay down non-tax deductible debt can mean that you are paying extra. An example of this is when you have a home loan on your principal place of residence (PPOR) which in non-tax deductible and a loan on your investment property which is tax deductible. Some loan structures have principal and interest payments on both loans. A better structure could be to have interest only payments on the investment property and pay the extra amount into the loan on the PPOR. This thereby minimised tax-deductible interest on your PPOR. There are other ways to minimise your non-tax deductible debt by using equity instead of cash as a deposit on an investment property. This is dependent on having sufficient equity in your PPOR or another property.
However, tax is only one consideration, furthermore, you should talk to your professional advisor.
Yes, flexibility means that you have options, you can take advantage of an opportunity that arises or respond to and emergency easily. So what does that mean in terms of your property investment loans? Well, if you want to buy or sell a property, some loan structures can either make this more or less difficult and more or less costly. Furthermore, if you want to refinance to take advantage of a great home loan deal, some loan structures make this very difficult and costly.
To take this even further, some structures can help you through something like losing your job or have other costs that your income will not cover your loan payments, you may dip into funds in an offset account or use funds in a line of credit. However, these are best set up in advance as applying to the bank for a line of credit after you lost your job just is not going to be approved by the bank.
Structuring your investment property loans effectively is not a one size fits all. It will depend on your situation (no surprise there), your objectives and future plans. If you plan to maximise your property portfolio as quickly as possible and can tolerate the extra risk that entails then some things that appear to cost you like lenders mortgage insurance (LMI) may be what you need as it give you the flexibility to use less deposit and a higher loan to value ratio (LVR) and you may be able to afford another property quicker. If your risk tolerance is lower and you prefer to grow your property portfolio a bit slower then you may want to keep your LVRs under 80% to avoid paying Lenders mortgage insurance.
The most effective way to make sure that your loans are structured properly is to utilise a mortgage broker who is knowledgeable in this area.