To enable us to identify the most appropriate product for the
situation it is important to understand your financial situation
and therefore the structuring requirements for the finance. So
our first step will be to look at the structures most commonly
used in financing of the investment property.
In order to purchase an investment property you will require
a deposit. This can be achieved by either saving the money
or if you have an existing property, say a family home where
you have some equity, you can borrow against this equity to
go towards the investment property.
Conceivably, an investor, who is a homeowner, could buy an
investment property without having to find any cash at all,
including all the costs associated with the purchase. Most
often, this is the recommended manner proposed by financial
advisors to investors, because the tax benefits to investment
are directly related to the borrowings and the associated costs
i.e. when you maximise the borrowings you maximise the tax
benefits.
To finance an investment property using the equity in the
family home you will need to provide both the home and investment
properties as security against the loan/s. This gives rise
to three possible financing scenarios, those being:
| One loan is sought for both the home and
investment property. These days you can get a single loan
facility, which can have several accounts. In this case
we would set up two accounts, one for the family home and
the other for the investment property. As they are separate
accounts there is no confusion with the tax-deductible
portion of the investment property and the non tax-deductible
portion of the family home. |
| Two loans one for each
property, where the existing home loan is increased to
provide the funds required facilitating the investment
purchase. The increase to the existing home loan should
be done with a multi-account loan to ensure the investment
portion is separate from the non-investment portion.
This will ensure that the tax deductible and non tax-deductible
portions are separate and easily recognised. |
| Three separate
loans one for each property and the third loan sits behind
the loan on the family home and is used to draw the equity
needed to facilitate the purchase of the investment property.
Usually, in this case and in that of point 2, the loans
are arranged so that the total borrowings against the
properties negate the need for mortgage insurance (where
borrowings are less than 80% of the value of the property).
This option is not often used with the invention of the
multi-account loans, which will be explained later in
the article. |
Which of the above structures
is the best? Well that really is largely dependent on how
you feel about separating the family home loan from the investment
loan and secondly how much the lenders are going to charge
you in fees for the set up. Of course if you are to purchase
an investment property without using a second property you
will only require a single loan. Our next step is to consider
the types of loans that are available.
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