What many investors do not realize when seeking a best investment loan is the difference flexibility and structure in an investment loan can make to their returns. Many investors when taking an investment loan gear the investment property to 80% and make up the balance with cash rather than taking a further investment loan secured over their home property for the balance of the purchase price. Instead of paying interest on your home loan in after tax dollars you reduce this “bad” personal non-deductible debt and instead increase your “good’ deductible investment loan borrowings.
Principal and Interest vs Interest only? Even if you are in a position to repay the investment loan on a principal and interest basis you would be much better off financially if you applied that portion of principal normally going to the investment loan, to an extra repayment on your home loan. Interest rate applicable to the investment loan. The loan structure. Make sure you do not “mix” your investment loan by including it as part of your home loan. The investment loan must be a separate investment loan account. If you do not structure your investment loan this way then any extra principal repayments must be apportioned between your home loan and your investment loan. Again you end up having to reduce your good debt rather than the non-deductible home loan debt.
When considering an investment loan you should ensure that you maximize your investment loan and that the interest rate is competitive (but not necessarily the cheapest – do not sacrifice features for interest rate); you should take the investment loan on an interest only basis and apply any surplus cash you have to the repayment of your non-deductible (your negative gearing benefits are maintained); you should not mix your investment loan with your home loan debt because the Australian Tax Office requires that any additional repayments of principal to such a “mixed” account must be apportioned between the home loan and the investment loan (your negative gearing benefits on your investment loan will reduce as a result).Another feature that all investors should include in their investment loan is a separate capitalizing investment line of credit. The importance of a capitalizing line of credit within your investment loan structure cannot be underestimated.
In a recent private ruling issued by the ATO a taxpayer was provided with a favorable outcome when he sought confirmation from the ATO that where he held an investment loan and the rental income did not cover his investment expenses (interest, costs, rates etc) then he could capitalize interest on an investment line of credit where the line of credit was used to meet the shortfall between his investment income and his investment costs (interest on the investment loan being a large portion of this. The interest also increased with the result that the taxpayer could deduct the simple interest on the investment loan as well as the simple and capitalized interest on the investment line of credit. Make your investment loan work for you and improve your investment return.