Which Investment Loan is For You?
There are many investment loans for you to choose from. You may select to have just one home loan that covers both properties or have separate loan facilities for each property.
|Advantages for having One Loan:||Disadvantages for having One Loan:|
|Advantages for Separate Home Loans:||Disadvantages for Separate Home Loans:|
There are a number of features you may want to consider when selecting a home loan for your investment property:
The benefit of having an interest only period on your mortgage is to free up some of your cashflow. You may not have a tenant ready to move in as soon as the home loan settles and there may periods where you are making home loan repayments and not earning a rental income. Having an interest only home loan can minimise this burden.
Interest Only: The interest portion of your home loan is paid each month whilst the principal remains at the full balance. The Interest Only period of the home loan is available for up to 10 years and may be extended upon application. After this time the home loan will revert to a principal and interest arrangement allowing the home loan to be paid in full.
Extra Repayments/Redraw Facility:
The benefit of this feature is that you may want to make extra repayments and create a kitty for times when you have unexpected expenses such as plumbing/electrical repairs or are not receiving a rental income. A loan with this feature allows you to skip a mortgage repayment as long as you have enough funds in credit to cover that mortgage repayment.
The benefit of having this feature is that you can deposit the weekly rental income you receive from the investment property and any other income into an account which can offset the interest you are paying on your home loan. Saving you interest on your home loan (not the investment loan) and getting you closer to owning your own home sooner.
Split Home Loan:
A split loan facility lets people combine their home loan and their investment loan under one umbrella facility. These arrangements allow people to direct loan repayments to their home loan while allowing interest to capitalise on their investment loan. In other words, you can separate the non-deductable debt portion of your home loan from the deductable portion and you will receive separate loan statements for each split.
Equity Home Loan/Line of Credit:
This is a home loan with a Line of Credit facility attached. You are able to get interest only Line of Credit Home Loans.
A Line of Credit allows you to borrow money up to a specified limit. The funds will be made available to you and you access them as required. A line of credit, generally arranged before the funds are actually required, provides flexibility for the customer in that it ensures the ability to meet short-term cash needs as they arise.
Below is an example of how an equity home loan with an interest only line of credit facility uses capitalised interest as an investment strategy:
If you currently have a home loan for $300,000 and your house is worth $550,000 you will have equity of $250,000 which you can use toward the purchase of your investment property. To avoid Lenders Mortgage Insurance (LMI) you will want to keep your Loan to Value Ratio below 80%. Therefore 80% of $550,000 equates to $440,000, less the $300,000 you currently owe leaves you with $140,000 to put toward your investment property.
You have a home loan line of credit for $400,000 and you owe $300,000, you would only be charged interest on the $300,000. Let’s say that the interest charged this month is $2000. Instead of you paying that money, capitalising interest allows you to add the interest charged to the principal of your loan so that you will now owe $302,000, whilst not having paid a cent. You can continue to not make interest repayments until you reach your line of credit limit of $400,000. It is important to note that you could reach your $400,000 limit quite quickly, because next month your interest repayment will be calculated on $302,000. Whilst you are not making any repayments, every month the amount your interest is being calculated in increases, using up your line of credit faster than in other ways.
Capitalise Interest: Loans that have the facility to Capitalise Interest have the added benefit of allowing you to pay next year’s interest in the current financial year. This creates a further tax deduction for eligible borrowers.