How do you structure a loan on an investment property to maximize investment property benefits? Here are different types of home loans to consider.
Fixed, Variable, Interest Only. Choosing a home loan can be as daunting as choosing a paint colour for a new home. Today, we are spoiled for choice and that sometimes makes it harder to choose. As an investment savvy mortgage brokers, we can help you choose the right loan for you.
1. Interest only vs Principal, Interest and Fees (PIF)
Interest Only Loans
Interest only loans are ideal if you want to:
a. Free up the principal component to use for other investments, as interest is the only part of the repayment that can be claimed as a tax deduction
b. Free up your cash flows for other investment opportunities or pay down non-taxable debt like your own home
c. You also have the option of paying your interest in advance. This allows you to pay 12 months’ interest upfront for a reduced interest rate. Most financial institutions offer terms of 1-5 years
Principle and Interest Loans
Many home loans have flexible features that allow you to tailor your loan to your situation and change if things change for you. These include:
a. Ability to make extra payments to your loan
b. Redraw facility that allows you to draw on your extra repayments from your loan when needed
c. Ability to take a repayment holiday if you’ve made extra repayments
d. Ability to apply to increase your home loan if additional funds are needed
2. Offset vs Redraw
A 100% offset account allows you to withdraw the money for any purpose without affecting the tax-deductibility of the loan. This is because an offset account is separate from your investment loan account.
As a result, you can make repayments (and access them if required), without affecting the size of the investment loan. There is no negative gearing or other tax implications in relation to the use of your deposit account.
If you’ve paid off more than the minimum repayments on your home loan, the redraw feature lets you withdraw the extra money you’ve paid into your account. It gives you easy same day access to your own funds to use for any purpose at any time.
3. Fixed vs Variable
Fixed Loan Structure
A fixed loan is just that – it’s fixed. You fix the interest rate for a certain period. Most people take a fixed loan for 1-5 years. However some lenders may offer longer-term fixed loans.
With a fixed loan, your interest rates stay the same. This means you know exactly what you’re going to be paying every single month. You can predict your cash flow in advance. Another benefit of fixed loans is that your loan is set and won’t be affected if interest rates go up.
However, fixed loans do have their limitations. You can make extra payments up to a certain limit, but if you exceed this limit, you may have to pay break costs.
Variable Loan Structure
The variable loan structure is the most common way people structure home loans.A variable interest rate is – as you may have guessed – variable. It can change over time. If interest rates change in the market your interest rate changes as well. If interest rates go down then your interest rate may go down and the amount of money you have to pay will decrease. But, if the interest rates go up then your interest rate may go up and the amount of money that you have to pay will increase.
Variable rates are great because you can maximise the savings if the market goes down. You can pay off more money on your mortgage then if you have a fixed loan. Variable loans allow you to pay less interest charges if you pay off the loan faster.
Talk to your mortgage broker when choosing your loan structure and ask them to explain if you are unsure of any features.
Contact us for a FREE no obligation consultation or discuss strategies to correctly structure your loan on 03 8390 5855 or email firstname.lastname@example.org