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Loan structuring for investing

Every lender has their own terms and conditions, and this is intended only as a general guide to understanding this topic. Contact us to discuss your individual circumstances.

To enable us to identify the most appropriate product for your situation it is important to understand your financial situation and therefore the finance structuring requirements. So our first step will be to look at the structures most commonly used in financing an investment property.

In order to purchase an investment property you will require a deposit. This can be achieved by either saving the money or if you have an existing property with some equity, you can borrow against this to go towards the investment property.
You could buy an investment property without having to find any cash at all, including all the costs associated with the purchase. Most often, this is the recommended manner proposed by financial advisors to investors, because the tax benefits to investment are directly related to the borrowings and the associated costs i.e. when you maximise the borrowings you maximise the tax benefits.

To finance an investment property using the equity in another property you will need to provide both properties as security against the loan(s). This gives rise to at least the following three common financing scenarios:

1. One loan is sought for both properties, with separate sub-accounts for each property. As they are separate accounts there is no confusion with the tax-deductible portion of the investment property and the non tax-deductible portion of the family home.

2. Two loans – one for each property, where the existing loan is increased to provide the funds required facilitating the investment purchase. The increase to the existing home loan should be done with a multi-account loan to ensure that tax deductibility remains clearly defined as the investment portion is separate from the non-investment portion.

3. Three separate loans – one for each property and the third loan sits behind the loan on the first and is used to draw the equity needed to facilitate the purchase of the investment property. Usually, in both this and scenario 2, the loans are arranged so that the total borrowings against the properties negate the need for mortgage insurance (where borrowings are less than 80% of the value of the property).

Which of the above structures is the best? Well that is largely dependent on whether you are using the family home or another investment property, what advice you receive from your accountant and financial planner and the costs that a lender will charge you for each scenario.