Investment Loan Structure
An Investment Loan Structure that can help repay your Home Loan Faster
Here's a couple of scenarios: You have an investment loan and a home loan but they are currently structured as two separate loans. Or, you have a home loan and are considering an investment loan to assist with a property or share purchase. If either of these apply to you, then it's really important to get the right structure for your borrowings. Here's why.
If your current loans (home and investment) are both principal and interest facilities, you need to convert your investment loan to one that is interest only. The reason for this, is that instead of paying principal reductions on your investment loan which can provide you with negative gearing benefits you should be aiming to repay as much as possible towards your non-deductible home loan.
As an example, instead of repaying $200 per month in principal against the investment loan, by leaving the investment loan repayments as interest only, you can apply the additional $200 to your home loan. By doing this each month on a $200,000 30-year home loan you can repay the loan around 10 years earlier, saving yourself around $100,000 in interest!
This alone should be motivation enough to talk to your lender about infestment loan restructure and if for any reason your lender does not allow you to do this, then you need to seriously shop around.
This is a significant amount of money and yet many investors with home loan or personal debt do not realise how important it is to do this, and repay the non-deductible debt as soon as possible.
The other key aspect of an investment loan that investors often overlook is the inclusion of a capitalising interest feature. Recently, the ATO confirmed that the capitalised interest on an investment loan is deductible where a taxpayer chooses to capitalise the interest shortfall, maintenance and other costs, rather than subsidise the investment loan by applying income from personal excursion.
However, the ATO has ruled against loan structures where the lenders are the same and the investment loan capitalises while the rental income on that loan is applied to the repayment of the home loan debt. This is not an acceptable structure but it is generally acknowledged that the taxpayer is not required to subsidise any shortfall between rental and interest/costs on an investment from personal income.
The shortfall can be borrowed and the interest on that should be tax deductible (by way of “nexus” – original loan for investment purposes, money borrowed to pay interest or on-going costs on that loan also becomes tax deductible). By borrowing the shortfall between rent and interest/ on-going costs the investor is able to utilise surplus personal income towards making additional repayments to a home loan and therfore, pay it out much faster.
In one particular case the investor was able to apply on average an additional $650 per month to his home loan (this included the interest shortfall (rent less interest payment) agency fees, council and water rates. By making additional repayments of $650 per month to the $200,000 home loan with a 30 year term, the debt is repaid in just over 12 years and the savings in non-deductible interest to the borrower exceeds $180,000. Obviously the investment loan increases by the shortfall amount borrowed to meet the balance of costs on the investment, but this remains a more efficient structure for any taxpayer with both a home loan and an investment loan.