Fixed rate loans
Many investors choose to fix their mortgage interest rate. With a fixed rate loan, the annual interest charge for each year is known upfront. This means landlords can prepay up to 12 months of interest each year - a cost that may be claimed as a tax deduction.
This can be a way of evening out your tax bill in years when income from other sources (such as wage and salary payments) is higher than normal. The success of this strategy hinges on having sufficient cash to prepay interest, and it’s always sensible to speak with your tax advisor to ensure you can claim the full interest charge as an expense in the current tax year.
Interest only loans
Paying interest-only can be particularly useful for property investors trying to minimise their outgoings beyond what’s absolutely necessary; e.g. interest payments. This may help investors to limit losses on a negatively geared property, or may even tip their investment into a cash flow positive one.
Investors who are negatively gearing are generally less concerned with paying the principal amount of their loan debt down progressively. In fact, they may not plan to make a dent in the principal amount at all. Their longer term plan is to recoup the value of the debt, plus a nice tidy profit, by selling the property some years later after it’s gone up in value (this is known as capital growth).
Line of credit
Lines of credit are similar to having a big chequebook, but with interest accruing on the balance. A line of credit, or equity line as they’re sometimes called, is an approved limit of borrowings that you can use a piece-at-a-time or all at once.
If you are using the money for investments such as property, which earn a good return, you are likely to increase your net wealth. Similar to an overdraft account, a line of credit allows you access to additional funds by drawing on the equity value of your home. You may not wish to sell just yet, but if the value of your home has appreciated, and you are in need of some extra cash to finance a home improvement or even an investment property, a line of credit loan may be the answer.
Tips for you
Your investment mortgage is interest only and you apply any surplus cash you have to the repayment of your non-deductible personal or home loan debt (your negative gearing benefits are maintained);
You don’t mix your investment loan with your home loan debt. The Australian Tax Office requires that any additional repayments of principal to such a “mixed” account be apportioned between the home loan and the investment mortgage (your negative gearing benefits on your investment loan will reduce as a result).
Include a separate capitalising investment line of credit. The line of credit should be for a 10 year interest only term. The importance of a capitalising line of credit within your loan structure cannot be underestimated.
Choosing an investment loan
We understand the needs of property investors are different to those of owner-occupiers. That’s why we have a range of home loans designed to help you meet your specific financial goals. We make property investment easier.
- Negative gearing
- Use the equity from another property
- 100% investment property loan
- Pick the right type of mortgage to suit you
A variety of lenders offer investment property loans but they may not all fit your specific investment goals and risk profile. By gearing your property portfolio with the right loans you can maximise your borrowing capacity, extend your interest only periods and reduce the size of your deposits. This means that you can buy more investment properties and achieve your investment goals faster!
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Organize all banks loan products and pick the best loan suits your needs.
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