When you borrow to invest, in effect your property becomes a part of a big melting pot. Rather than think of your debts as they apply to each property, you should be thinking of your debt as one amount, and the total value of your properties as another. The value of the ‘melting pot’ (that is, all of your properties combined, be it just one, or many) determines the total amount you can borrow, subject to you also satisfying servicing criteria. Generally speaking, and without needing to employ lender’s mortgage insurance, you can borrow up to 80% of the total value of this pot of property/ies.
However, this does not mean that the debt is represented as a single loan, and that is not the best way, both structurally and from a taxation point of view, to manage your investing.
When you have a single debt covering all of your property, your accountant must establish which part of the debt is attributable to your personal borrowing (e.g. your own home) and which part is attributable to investment borrowing, to establish how much of the interest is tax deductible. This is done at the start, by working out the percentage attributable to each property. This can become messy when you make extra repayments, as the tax office will consider that all repayments to the loan are paying off each part of the debt according to that same percentage.
But, where you have home and investment debt, you really want any extra repayments to be attributed to your home debt, as you want to pay that loan off first. This is because the interest on your own home is not tax deductible, while the interest on your investment loan is. The cleanest and most effective way to achieve this is to ensure that your investment loan is quarantined from your home loan, and this is done via two separate loans.
The other benefit to this kind of structure is that you can direct all of the income from the investment property into your own home loan, thus making extra repayments and accelerating the speed with which your home is paid off. The only requirement is that you at least meet the interest bill on the investment loan each month with an interest repayment. It is for this reason that I generally recommend that investors have a principal and interest loan on their own home, and an interest only loan on their investment. If you have bought wisely and have an investment property with a positive cash flow, all of this extra cash flow can be making extra repayments on your own home loan and reducing its term dramatically!
The tax office is very specific about the difficulties that mixing personal and investment debt together can present, and by getting this wrong, you may be inviting unwanted attention into your life. Be sure you consult a broker who understands not only borrowing, but also property related tax matters before agreeing to any kind of loan structure.
