Structuring Loans for Future Property Investments
Many Australians invest in property to secure their financial future. Australian property values have a long-term growth trend over the last 30 years, even if there are short-term periods when prices stagnate or even decline in some markets.
According to the latest statistics, about two-thirds of Australians either own or are paying off their own home. In addition, Australian Taxation Office (ATO) data shows that over two million Australians currently have one or more investment properties.
If you want to build an investment property portfolio, it’s important to structure your loans so that you can do the following three things:
- legally minimise your tax obligations to the ATO,
- optimise your cash flow, and
- reduce your debt on the home that you’re living in.
There are a number of smart loan structuring strategies to help you do that.
1. Make sure you have a redraw facility and an offset account on your home loan
If your home loan has both redraw and offset account facilities, you can use them for the strategic financing of both your home and for one or more investment properties in the future.
As you pay off your existing home loan, you build up your degree of equity (ownership) in it. Your equity typically increases in two ways over time:
1) by your loan balance reducing, and
2) by your property’s value increasing.
It’s a far better strategy to redraw your home equity as your deposit for an investment property, rather than using your savings. That’s because the interest on your investment property loan is tax-deductible, and the interest on your home loan is not.
It’s smarter to keep your savings in an offset account to reduce the amount of non-tax-deductible interest that you’re charged on your home loan. On the other hand, the interest on the equity that you release from your own home to use as a deposit on your investment property loan will be tax-deductible, so it makes financial sense to do that.
2. Avoid using your home as security for an investment property loan
Lenders require security when approving any property loans. This security for an investment property loan should be the value of the investment property itself. Avoid using your home as additional security if possible.
If you give your lender security over two or more properties for a single loan, this limits your flexibility and ability in the future. It gives the bank too much control over your investments, and it can also reduce your borrowing power.
3. Consider an interest-only investment property loan
If you choose an interest-only loan for an investment property, you will both minimise your repayments and maximise your tax-deductible interest. That’s because you’ll only be paying loan interest with your repayments, not principal and interest.
You can use the surplus rental income you receive from the investment property (after paying your loan interest) for other purposes, such as reducing the debt on your loan for the home you live in. This structure allows you to focus on paying off your existing home loan faster, thereby reducing your non-deductible interest expense, whilst retaining a larger tax deduction, rather than paying off both of these loans at an equal rate, thereby reducing the tax effectiveness of your loans.
How we can help
At Qi Wealth, our experienced, expert team of financial advisers can help you to structure your home loan so you’ll be able to capitalise on future property investment opportunities. We’ll take the time to understand your individual circumstances so that we can provide you with the best possible advice. We develop long-term, trusted relationships with our clients.
Contact us today to find out how we can help you!