If you’re considering making your owner-occupied home an investment property down the track, then you need to consider the loan’s structure from the very beginning.
By CHRIS ACRET
There’s a lot more to sourcing and managing the finance around a property purchase than simply telling your bank how much deposit you’ve got, what security you’re offering and getting a loan ‘off the shelf’.
Quite often lenders and their loan consultants take a ‘one size fits all’ approach to arranging a loan, but financing just isn’t like that.
For example, if it’s part of your longer-term plans to make your owner-occupied home an investment property in the future, you’ll need to think about the way you structure the initial loan.
Taking this into consideration from the outset ensures the property can easily be turned into an
investment property down the track.
As part of this strategy, you would generally look to put in only the minimum necessary deposit initially, keeping the remaining funds in an offset account, to maximise the debt and minimise the interest payments that need to be made while it’s an owner-occupier property.
However, your lender may be keen for you to put the maximum deposit in from the outset and may not be proactive in providing advice on how to manage the loan so it’s easily turned into an investment loan in the future.
The aim is to pay minimal interest while you’re living in the property, because there are no tax deductions during that time, but at the same time keep your options open.
When you turn it into an investment property it still has a high level of debt on it for tax effectiveness and you have access to every available dollar in the offset account for the deposit on your new owner-occupied property.
Lenders will always tell you what they need to ethically and legally but it’s important to remember that while they want to help you, their business needs are their primary consideration.
Lenders’ policies and options vary considerably from one lender to another. In fact, there’s a significant disparity between lenders on interest rates, fees and credit policies.
There tends to be a widespread view that all banks are the same, but when you make comparisons between lenders, it quickly becomes clear that’s not the case.
It’s important to shop around – and consider the advice of an experienced mortgage adviser who has access to information on loans from multiple lenders.
Chris Acret is the managing director of Smartline Personal Mortgage Advisers, which is a multi award-winning franchise group that has built a reputation for advice and client care. Around 85 per cent of Smartline’s business comes from personal recommendation. Visit www.smartline.com.au
Great advice, I have noticed that investors, even with good servicability always get stuck at around 4 properties if they are too loyal to the same lender.
Comment by Rob — July 17, 2010 @ 2:51 am
This appears to be extremely poor advice by someone who needs to do their homework. The Australian Tax Office look at the intent behind establishment of a loan for tax deductability purposes. If you take out a loan for an owner occupied house, you can not EVER claim interest on that loan, even if you later convert the property into an investment.
This is very poor advice indeed from Chris Acret.
Comment by Simon — July 29, 2010 @ 5:45 am
The rule is it’s what the money borrowed is used to buy that counts, however if that purchase is income producing at any time then the interest is a cost of earning income so it becomes deductible.
Comment by Julia Hartman — July 29, 2010 @ 1:49 pm
I have a similar understanding to what Simon has described. When taking out the loan it is asked on the mortgage application what the purpose of the loan is. According to my understanding, if it is not stated that the purpose of the loan is to fund an investment property then the interest costs are not tax deductible. To be fair to Chris he does say to consider the structure of the mortgage from the outset. Could one say on the mortgage application that the intention is to occupy the property with a view to turning into a rental property in the future?
Comment by TIPC — September 29, 2010 @ 9:59 pm