Happy New Year! The beginning of another year, for some it's time to kick start hose goals we set a little over 2 weeks ago and get the wheels in motion. For some losing weight is the goal, for others buying property and for others it could be anything. Investing is my pick of the bunch, setting myself up for years to come and planning an early retirement is definitely my long term goal. No time like the present to get it going though.
Assuming you've got your deposit, or you own a house already and there's a bit of equity in there, I'm going to discuss structuring your loans and the repayment types you have at your disposal. All riveting stuff but getting it right or wrong could be the difference between owning multiple properties or only one and it's getting the minor details right from the start.
If you already own property and are going to use the equity in your home to buy an investment this paragraph is for you. If you are planning on using cash you could skip this one. Something I always stress to my clients purchasing investments and using their own home is do not cross collaterize. Cross collaterizing is when you use one house as security for another house. The biggest pitfalls from my point of view are you can restrict the amount of value you can withdraw from a property that has grown in value as well as restricting your freedom to move down the track. If Bank A has a rate 5% on investment lending and Bnak B has a rate of 4% but you have both of your houses cross collaterized you need to move both houses to Bank B. If they aren't cross collaterized you can put your investment loan where it is best suited and your owner occupied place with the bank best suited to it. You can also access equity from either property without even discussing the other property. To avoid crossing properties you can obtain a second small mortgage (enough to cover the 20% deposit and upfront costs for the investment) and use those funds to get a mortgage to cover the other 80% of the purchase price of your investment property.
Moving forward, you need to decide if you want to pay down the loan by making principal and interest repayments or only paying interest charges using an interest only facility. Read more about interest only loans here. Interest only makes your repayments lower meaning you have more cash week in week in week out. It also means that your loan is staying at the same amount though which isn't ideal but interest only does provide another large benefit as you can use the extra cash you have to pay down any owner occupied debts. The reason for doing this is that your investment debt is tax deductible whereas the mortgage on the house you live in is not. The lower the interest charges on your investment just means a lower tax deduction as opposed to paying off a loan that has no tax association.
On the tax discussion, if you were to pay the mortgage on your investment loan down or even pay enough to close it you can't then reopen the mortgage with the view of using the funds to clear any owner occupied debt and claim the interest as a tax deduction. Even though the security against the mortgage is an investment the focus is on what the purpose of the funds are for. So when you get the small mortgage against your owner occupied house to use as a deposit for an investment it is tax deductible due to the purpose of buying an investment. When you borrow funds against your investment to purchase a car for personal use or clear an owner occupied home loan because the purpose is not something that is associated with tax you can't claim deductions against it.