Silly Question from a newbie re: Investment Property

Hi All,

I'm new to this forum so apologies if this question is daft !

I'm investigating acquiring an investment property, and I've been reading up on Negative Gearing and offset accounts etc.. all good.

My question relates to maximising the negative gearing tax break on a 500k mortgage on an investment property.

Given that my partner and I have disposable income after paying for a 25yr mortgage on this property, and can afford to pay more off the mortgage each month, does it make sense to reduce the terms of the mortgage to say 10 years, so that the per month tax benefits are greater (assuming that the per month loss will be higher with a higher monthly repayment) ?

Also, out of interest do most people get Interest Only mortgages for investment properties, and if so what is the benefit ?

Cheers all,

Rob

 

Paying off non-deductible debt?

 

If you have non deductible debt you would generally want to pay this off first.

If none you could take a PI loan on an investment property. You could pay extra, but you could achieve similar results with an IO loan with an offset and still have the benefits of tax flexibility. The only time you wouldn't want to do this is if you are tempted to spend.

having a short term on the loan will hurt your serviceability if you want to buy another investment property too.

Also once you money is in the loan taking it out will cause tax issues - eg. if you wanted to upgrade your main residence.

Ideally,
1. Get IO loan for as long as possible with an offset account.
2. Place all income and rents into the offset (assuming no private debt, if you have private debt use the offset linked to your home loan).

This way your payments are low, but you can save interest by depositing into the offset. You can still make the same level of repayments, but have the flexibility to reduce this when and if you want and you will still have access to cash for private expenses.

 

Rob,
The first question is why you want a negatively geared property and what is your goal?. If it is a property you expect reliable and consistent capital growth and you can afford the rent shortfall, then taking on a negatively geared property could be acceptable as long as some time in the mid term future, it becomes positively geared. There is absolutely no point taking on a negatively geared property that will never generate a positive return.

There are a number of ways to increase the tax benefits, mainly through the building allowance (new/er properties) and depreciation. Lenders mortgage insurance (LMI) is another where you borrow > 80%.

The tax deduction you will receive on the loan only relates to the interest component, so if you pay more than the interest it will be coming off principal and is not deductible.

It was not clear whether you have a home loan, if you do then make any extra repayments on this loan. If you do not have a home loan or personal debt, take an IO loan 5 year term (easier for servicing calculation purposes) with an offset. Put you funds into the offset and have an auto debit for the monthly interest on the loan. If you do put additional funds into the offset, this will reduce the interest payable and reduce the negative gearing amount.

There may be better returns for the additional funds from an after tax perspective than using the offset, so these should be considered also.
Good luck
Greg