Choosing the right investment property loan structure for your individual needs means considering a few different factors first.
Deposit or equity?
If you have enough equity in your owner occupied home, it might be possible to use this as security to purchase an investment property. Essentially, if you use the equity in your home, you won’t need to come up with the deposit required.
In some cases, banks may allow you to borrow the entire amount of the purchase price, plus any fees associated with the purchase for your investment property based solely on the amount of equity you have available in your owner occupied property.
Alternatively, you might prefer to borrow the deposit amount against your house and put those funds towards your investment purchase instead. Either way, your home is still used as security for the bank’s purposes.
In order to determine the amount of equity you have available, you first need to assess the market value of your property. For an accurate assessment a valuation can be ordered upfront by a licensed valuer.
You also need to know what the outstanding loan balance is on your home loan. Deduct the loan amount from the property value to determine how much equity you have in your home.
Lender’s Mortgage Insurance
If you have plenty of equity, you should comfortably be able to use it as security for either a deposit or as security on your investment property. However, if the amount of equity available is relatively low, you might need to pay Lender’s Mortgage Insurance (LMI) to complete the purchase of your investment property.
If the combined loan-to-value (LVR) of your owner occupied property and investment property is over 80% it would be best to avoid cross-securitising, as the lender’s mortgage insurance on the total of the two loans can be quite costly.
Also if you intend to buy another property in future, it is easier if your existing properties are not all cross-securitised, as each time you will need new property valuations for each property.
To use the equity in your home to raise sufficient deposit for an investment property purchase, you would need to either see if your current lender is able to increase your existing mortgage, or a good mortgage broker can combine a loan refinance/equity release with the investment loan.
Most lenders will allow you to borrow up to a maximum of 90% of the property value in a refinance, and up to 90% for an investment loan. The equity release portion of the loan may look as though it’s on your owner occupied property. However, as it’s being used for the investment property and set up as a separate loan, the interest on that portion will also be deductible as an expense on the investment property.
If you decide you want to put some money into the purchase, the best advice would be to pay this money off your owner occupied loan. Owing the full amount of the purchase price on the investment property works well, as all the interest charges on the investment loan are a tax deductible expense on the property.
Any expenses incurred from the loan application process, such as Lender’s Mortgage Insurance, establishment fees, or mortgage registration fees can be claimed as an expense on the investment property also.
Your owner occupied loan does is not tax deductible, so it is in your best interest to pay any spare cash you have off your own home mortgage first.
Investment property payment types
Many successful property investors prefer to keep their investment loan set to Interest Only repayments. The tax department only take into account the interest charged on your investment mortgage, but they won’t allow you to deduct any payments you make off the principle balance.
You’ll also find that paying only the interest component of the mortgage means you are paying the minimum payment amount, which can help with cash flow. In most cases the rental income you receive from your investment property should cover most of your repayments.
By comparison, it’s advised to keep your family home set to principal and interest repayments. One component of your repayment covers the interest charge, while the remaining amount pays down your home loan balance each month. Sticking to principal and interest repayments can help to reduce your home loan as quickly as possible.
Any extra funds gained by tax savings on your investment property can also be used to reduce your owner occupied loan.
There is a lot to consider to make sure you have the correct set up for your investment property, which is why talking to an expert in this area would be best.
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Disclaimer: We recommend that you seek independent financial and taxation advice before acting on any information in our articles and newsletters. They contain general information only and have been prepared without taking into account your personal objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances. Your full financial situation will need to be reviewed prior to acceptance of any offer or product. Interest rates are subject to change without notice. Lenders terms, conditions, fees & charges apply.