Investment Loan choices should be well considered

Many borrowers entering the investment loan market are happy enough to run with their existing bank who invariably will recommend a simple 25 year investment loan on a principal and interest basis with a 5 year interest only term initially. As a general rule the bank will not look at restructuring your existing loan to ensure that your investment loan is the best suited for you not just from a flexibility point of view but also from a taxation perspective. It is more likely that they will not wish to disturb any existing home loan you may hold with your bank for fear that you may consider a refinance and they lose you as a customer..

The fact is the banks are doing a disservice to you if this is their approach. The reality is that when you are looking for an investment loan you must consider your other borrowings because if you properly structure your investment loan with any existing home loan debt then there are benefits for you.

In the past borrowers have simply accepted that they need to draw on their personal income to subsidise the shortfall that occurs on a negatively geared investment (i.e. the rental income from the property does not cover the interest payments on the investment loan and other outgoings (rates, maintenance etc) incurred by the investor. It is also fair to say that in the past, loan structures have been simplistic stand alone facilities.

Today you are able to structure your total portfolio so that within the one mortgage you have various loan accounts each of which are flexible and offer opportunities to minimise your tax. The multiple loan accounts are necessary within your portfolio because:
1. your home and investment loans are not mixed (the ATO views mixed loan accounts dimly and will require that any principal repayment into a mixed home and investment loan facility be apportioned between the 2 accounts. You are not able to apply the total amount to reduce your non-deductible home loan debt first - a much more tax efficient option.
2. The cost benefit you will enjoy with the multiple accounts in that for accounting purposes income and expenses for each investment property are easily identified. Saves you in accounting fees!
3. you can include a capitalising line of credit as one of your accounts if you have built up equity in your home property. It is advantageous to put an investment line of credit loan into the mix because this not only provides you with a safety net to cover off any vacancy factor on the investment property (which might put a strain on your cash flow) but also and more importantly it allows you to draw on the line of credit to meet any shortfall in the interest payments on the investment loan or other maintenance costs associated with the investment property. By utilising the line of credit to service any shortfall in interest you receive a two-fold benefit:

(i) you can use more of your personal income to reduce your home loan non- deductible debt - instead of subsidising the cost of the interest on your investment loan.

(ii) by borrowing to meet the interest rate shortfall you increase the amount of deductible interest you can claim under your investment loan borrowings.

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