Loan Structuring

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:

  1. 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.
  2. 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
  3. 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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