What the best investment loan should offer you. Part 1

There are many astute property and share investors in Australia and invariably acquisitions are financed by some equity and also debt. What many investors do not realise when seeking an investment loan is the difference flexibility and structure in an investment loan can make to their returns.

The important features to look for in an investment loan are:
1. How much should you borrow? Taken that you have a secure job and reasonable cash flow then it is worth considering maximising your investment loan in that all interest payable on it is tax deductible. 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. This is an emotional decision – but not necessarily a tax efficient one. If you have the cash for the balance of purchase price (say $60,000) and also have a home loan then you would be far wiser to apply the $60,000 to reducing the principal amount of your home loan and then borrowing $60,000 as an investment loan being the balance of the purchase price. Sure, the investment loan is secured over your home property but at the end of the day it is the same $60,000 commitment. 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. This makes your borrowings much more tax efficient.
2. Principal and Interest vs Interest only? Again, while ever you have a home loan it is much wiser to have this personal debt on a principal and interest basis so that you pay it out as quickly as possible. 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. Even an extra $100 per month to your home loan can save you many thousands of dollars (e.g $250,000 @ 9% p.a. over 25 year term - extra $100 saves you over $65,000 in interest payments.)
3. Interest rate applicable to the investment loan. Obviously any investor wants to achieve a good interest rate. My advice is not to seek out the cheapest interest rate as in doing so you will invariably have to compromise on features.
4. 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.

SEE ALSO PART 2 Best Investment Loan.

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The author is the managing director of Austral Mortgage, the company offer competitive rates for www.australmortgage.com.au">investment loan, debt consolidation and www.australmortgage.com.au ">mortgage

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