5 min read | 20 May 2019
And to get maximum benefit from this and apply accurately you should set it up as an investor home loan from the get-go.
Having your home loan set up correctly at the outset means you can take advantage of the tax benefits that come with being an investor – after all, you’re investing and becoming a landlord to secure your future financial comfort, right? Tax benefits for investors can include the ability to claim back the cost of your home loan interest repayments, bank charges and household repairs. If the purpose of the loan is for an investment, then should set up this home loan as an investor loan from the get go.
Many investors choose interest-only home loans for a period of time, and temporarily avoid paying down the principal. This maximises their tax deductible debt repayments as they aren’t reducing the size of the loan. Often these interest-only investors are looking for capital gains (vs rental yield) over an extended period of time. In other words, they are hoping the value of the property will increase, and they will make a profit when they sell and settle their mortgage. For those investors, paying-down the loan itself is less important than the profit they will make when it comes to selling their property.
These landlords are often the ones who would be more likely to negatively gear a property (in other words, rather than make a profit from renting the property, they make a loss, and that loss can be used to reduce their total taxable income)
Having said that, it is possible to negatively gear a property without making a loss at the end of the financial year. And this is where it gets a bit technical – but depending on the age of the property you may be able to write off your assets financial depreciation each year. The newer the property, the higher the write off. Note that tax rules have recently changed as to whether you are eligible to do this depending on how long you’ve held the property. There are a number of companies that will prepare you a depreciation quote, and you should be able to check the tax implications with them or your friendly accountant.
Other investors prioritise rental yield over capital gain and want the rent to form part or all of their income. These investors may be less likely to gear their property negatively as they are expecting an overall positive return on their investment.
It is worth going into any investment property with a clear strategy and understanding the benefits and pitfalls of both negative and positive gearing.
Some investors may also choose a principal and interest investment loan, and with that, they may also consider an offset or a redraw account. Any money in an offset account will reduce the interest paid on a loan, but because it is a separate account, it can be accessed to fund for household repairs and bills, or other other things not related to the investment, without impacting the tax benefits of claiming interest.
Investors who have a redraw facility get the same benefits as an offset when it comes to paying less interest on their debt. Equally like an offset, generally a redraw can be accessed as needed to pay for things. But it gets tricky when you take money out of the redraw that doesn’t relate to the property itself (I.e. a new car). Negative gearing taxation benefits can then come into question for the full extent of the loan size. It pays to research carefully and discuss with an accountant if you’re looking to use a redraw for purposes not related to the investment. For more information on the difference between redraw and offset, see our handy guide here.
In some cases, you may choose to live in your property for a year before you rent it out, because of the capital gains concessions potentially available by using the property as your PPR (primary place of residence). You may also have applied for a standard owner-occupier loan when you purchased the property. This is the right thing to do initially, and when you move out it is advisable to speak to your lender about a loan variation, and the property becomes an investment. It shouldn’t be a complicated process and make sure you choose a lender who makes it easy for you to vary your loan as your needs change. Capital gains can be tricky to navigate so you may want to read more about it here, or hit up your friendly accountant.
If you are refinancing, always apply for the loan type that reflects your current occupancy scenario. If you live in the property when refinancing an owner-occupier loan is the most appropriate.
When your circumstances change, you always need to let your lender know so they can ensure your loan type best fits your situation. If you started the application process as an owner-occupier, and during the application and find you need to change to an investor-loan mid-stream, then it’s a simple matter of telling your lender who will alter your product. With the right lender it shouldn’t be a big deal, just a simple change to your application and a fast confirmation of any additional documents needed (such as a rental valuation). If its prior to contracts being signed then the right contract can be written, or afterwards a straight-forward variation agreement. This is how Athena works, and if this could be your scenario, take care to check out how easy other lenders make it.
At Athena, we believe investors have been propping up the economy for too long yet always seem to be slugged with higher rates and restrictions. We think investors deserve red-hot interest rates too, and we have some pretty compelling rates on offer. And we don’t believe in charging you for being a customer, so we’ll never charge you application, ongoing, or exit fees.
Ensuring your loan repayments marry up to your tenants’ rental payments can sometimes be a pain in the bum. At Athena, we match outgoings to incomings – Choose your loan repayment frequency and the date your repayments come out, so they match your rental repayments to keep your cash flow healthy.