Investing in property is a popular wealth creation strategy among Australians. If you’ve built up some equity in your own home, you too might be considering taking the plunge with your first investment property.
But what’s the best way to structure your finance? Should you get a new, separate investment loan, or combine the new property into your current lending arrangements?
Whatever your choice, there’s one key principle to keep in mind: “It’s important for taxation purposes to identify separately the debt that relates to the investment property,” says John Yeldham, from Yeldham Taxation and Business Services. This is because costs associated with your investment debt, such as interest and fees may be able to be claimed as a tax deduction.
A consolidated loan
One option is to combine your investment property loan and private debt all within the one facility – as long as the product is suitable.
- If your loan product allows, you can split the loan into sub accounts, one for the owner-occupied portion of the loan, one for the investment – or whatever structure suits your situation. The sub accounts make the purposes of your debt distinguishable for assessing investment tax deductions.
- Sub accounts also allow greater flexibility of features. Sean Beavis, Aussie franchisee in Newtown, Sydney says that Professional Package products are an excellent choice. “They do usually allow the greatest amount of flexibility – you can have one account principle and interest, one account interest only, or you might decide to go back and fix one of them.”
- Professional Packages may also be able to accommodate your future lending needs – say for another investment property or shares – within the same facility. “Most of them will allow you to just tack on another account,” says Beavis. “That usually enables us to accommodate a client’s further needs without having to [refinance].”
- If you have a lot of equity, you can pay for the whole new property plus costs without having to provide additional security, which means saving on things like security valuation fees.
- If your current product is a basic one, it may not cater to your investment needs. “Some of them will only allow you to have one account… which is obviously going to get messy as far as accounting is concerned,” says Beavis. “It might be a shortcoming later down the track – if you don’t have the flexibility you might end up having to refinance because the product just doesn’t suit.”
A new investment loan
Another option is to establish a new loan for your investment property – either with the same financial institution or a different one – and keep it separate from your home lending.
- The new investment loan creates a neat distinction of investment debt for your tax accountant when deducting the interest and loan costs. “The important thing is to separately identify that debt,” says Yeldham. “The cleanest and easiest way when you buy an investment property is to have a separate loan for that investment property… [It’s] very easy, well structured, easy to pick up borrowing costs, easy to pick up the yearly interest and bank fees, the tax department are happy because it’s clearly identified.”
- You can choose a loan product that specifically suits your investment needs, for example, interest only, line of credit, or fixed rate loan with interest payable in advance.
- You may still be able to borrow 100 per cent of the purchase price plus costs. “If you want to buy a $400,000 investment property, you might [need to] borrow $415,000 to buy the property and pay the stamp duty. You obviously can’t do that just secured against a property of $400,000 because [that is] more than 100 per cent of the value,” explains Beavis. The difference can be covered by tapping in to equity in your home loan, and combining it with the new investment loan to cover all costs.
- You may not need to put your owner-occupied property up as security for the investment loan, keeping the home you live in out of the equation. “It’s really an emotional thing,” says Beavis. “People sometimes say I don’t want my home used as security because I’d rather have my home unencumbered.”
- It’s another loan to manage and keep track of, making it a little harder to assess your overall financial position.
Investment lending scenarios can be a complex area, and every situation is unique. Consult an accountant and your mortgage professional to devise the best loan structure for your investment needs.