Choosing the right type of loan can make a difference in thousands of dollars; this applies not only to investment finance, but all types of finance.
By setting up a structure that allows you to make additional repayments and use your home loan like a savings account is one way to reduce the interest payable over the term of the loan.
For example, if you had a mortgage of $400,000 over 30 years and had a structure that allowed you to make additional repayments of $50 per week from the first month of taking out your loan, you could save $83,000 in interest or 5 years and 6 months off the term of your loan*. (*Figures based on interest rate of 5.15% and repayments of $503.68, this does not include any additional refinances or increases in loan term over the period of the loan).
The type of loan you take out will always depend on your current situation, for example – loans that allow you to manage and reduce tax, gearing and repayments.
Everyone is an “expert” when it comes to investment and tax advice, however, we @ wHere finance recommend that speaking with professionals like your accountant is always the best policy when it comes to investment finance. Your financial situation will in most cases be different to someone else’s and this is particularly important when considering investment relating to your superannuation.
Using your equity
There are a number of ways to structure your investment finance; one option is using the equity in your Principal Place of Residence (PPR). This can increase the amount you borrow and decreases the deposit you require and may also reduce the cost of lenders mortgage insurance. Advantages of this are;
- Only one set of fees & charges
- Less paperwork
- Lower Loan to value ratio
- One lender
- Possible interest rate discounts
The key again is speaking with professionals who will understand your investment property goals and plan for such situations.
As an alternative to using the equity in your home (PPR) to purchase your investment properties, you can have a separate line of credit facility for each property. You basically take out a line of credit against your PPR and use this as apart of a deposit to purchase your investment properties. This is mainly used by experienced investors as it allows them to purchase properties with ease and without the hassle of waiting for the lender to approve their purchase, plus, again reducing their costs by limiting the mortgage insurance payable. Again, like all loan types, it’s important to seek advice from a professional, something the team @ wHere finance can assist you with.
The reasons why you are purchasing your investment property, will infact be the reasoning for the structure and type of loan that suits your needs.
For example, if you still have a mortgage on your PPR and you aim to pay this off as fast as possible, you can leave your mortgage repayments on your PPR at Principal and Interest, and have the loan repayments on your investment property @ interest only. As the interest payable on your investment property is tax deductable, this allows you to keep the repayments at the lowest possible amount, and any additional money you have to pay off the home mortgage PPR.
If you don’t have a mortgage on your PPR, then making additional repayments on your investment loan is a wise move. By paying your investment property loan at a faster rate, this allows you to purchase future properties, using the equity in your investment property, rather than your home mortgage, or even just use the rental income as a passive income for yourself in the future.
Again, we @ wHere finance always recommend seeking the advice of your accountant, investment finance is so important to get it right, a difference in the structure and type of loan you go with can save or cost you thousands of dollars.
Interest in Advance
The third option is paying your interest in advance. Paying interest in advance basically means that you are paying the interest payable for a 12 month period in one lump sum before it is actually charged. This also allows you to claim the interest payable on your tax a year earlier than you would normally be able to. The loan term may range from 1-5 years depending on your lender. Paying interest in advance is only an option for those who are able to afford to pay the loan interest in a lump sum.
The extra money you save or earn because of the type of structure can help you to expand your property portfolio, undertake redevelopment projects, take advantage of the tax benefits of paying your interest in advance, finance renovations on your home, or even top up your superannuation.
To see other types of loans and what is right for you, see what type of loan is right for you. For advice or more information of what is the right loan for you, contact the team @ wHere finance.
Like to know more?
Contact us to arrange an obligation free consultation.