It's a common philosophy in property investment to start with the end in mind.
Unfortunately, this is often easier said than done, and loan structuring is one such overlooked strategy that could save investors tens of thousands of dollars over the course of their property investment journey.
While this article will outline some of the most useful strategies and structures that will benefit investors, please seek professional tax advice before making any changes to your loans as everyone's individual circumstances are unique to them alone.
That’s why I always recommend using an investment savvy finance strategist to enhance your borrowing options.
You generally only have one opportunity to crystallise the maximum tax deductible property loan and that is when you first purchase the property.
You can't contribute cash and borrow a lower amount and then subsequently increase the loan later because the purpose or use of the additional funds will determine whether the loans are tax deductible or not.
And taking a bigger loan so you can get your cash back does not qualify as "investment" purposes.
So you should always also structure your finances to give you as much flexibility as possible.
While banks will normally try and sway you to using a redraw facility and not an offset as this is administratively easier for them, this strategy often leads to creating non deductible borrowings.
That's why it is nearly always the best approach to borrow the full cost of a property and deposit any additional cash you have in an offset account, which you can access whenever you like.
Only interest only
Structuring your loan repayments as interest only – and not principal and interest – can provide an array of benefits including:
- It allows you to accumulate all surplus cash in an offset instead of reducing the loan principal, which preserves the loan principal at its original value that might be important for future tax benefits.
This could also be appropriate for your home loan as your home may become an investment property one day, too.
- It reduces your financial commitment to the lowest level and leaves your options open
Cross-securitisation is where the lender uses more than one property as security for a loan.
A simple example of cross-securitisation is where you have an investment loan secured by two properties – your home and your investment property.
It's vitally important to avoid cross-securitisation at all costs because:
- It doesn't allow you to maximise borrowable equity (i.e. lack of control over valuations).By avoiding cross-securitisation you can determine which properties to revalue and when, whereas the banks will want to revalue all of them because they are financially linked to each other which, depending on the valuations, could negatively impact your borrowable equity.
- It ties you to a particular lender and reduces your flexibility.Having all your properties separately secured gives you more flexibility as you might be able to refinance one property to a new lender, which will probably help you maximise your borrowing capacity, too.
- You have no control over sales proceeds and the bank can control any and all sales funds (if you sell a property) and force you to contribute it to repaying debts of their choice.
Putting all your eggs in one basket is rarely a smart thing to do in many (if not all) things in life including dealing with banks.
So, there are many advantages with diversifying lenders, including:
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- Sometimes a lender knows too much about you and therefore has too much control over your personal, business and investments.
- It is possible to better maximise your borrowing capacity by using multiple lenders – of course it’s still important to borrow within your defined limits.
- Banks are less likely to get “lazy” if they know they don’t have all of your business, so it keeps them on their toes and prevents them from becoming complacent.
- Bank property valuations commonly vary significantly from one bank to the next, so having a relationship with two or more banks will allow you to maximise your borrowable equity.
Most investors will be long-term borrowers because they understand the advantages of holding property for as long as possible.
Taking a long-term view, it makes sense from time to time to fix mortgage interest rates, but it's good rate management to stagger the expiry of fixed rates.
Doing this will give you more flexibility to review your interest rate management at regular intervals.
Of course an early payout could create exit penalties so your loan structure should take this into account to minimise or eliminate this penalty.
For self-employed investors, sometimes having your business and private banking with the one bank might seem convenient.
The main problem with this scenario is that the bank has too much control and they know too much about you.
If you separate your business banking from your personal banking, you control the amount of information each side has, which is especially beneficial if your financial situation changes.
With many financial matters, it makes sense to obtain professional advice when establishing your loans to ensure that you're starting your property investment journey from the very best position.
By seeking the right professional advice and assistance, your property investment experience is likely to be smoother as well as more financially beneficial over the long-term.
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This article is general information only and is intended as educational material. Metropole Wealth Advisory nor its associated or related entitles, directors, officers or employees intend this material to be advice either actual or implied. You should not act on any of the above without first seeking specific advice taking into account your circumstances and objectives.