Because the interest paid on investment loans is generally tax-deductible, investors often want to maximise their investment debt.
Even if you have a sizeable deposit for your investment property, it makes sense to use that money to reduce non-tax-deductible debt - such as your credit card bills or home loan - and borrow as much as you can to invest.
Of course, another reason you might want to borrow the full purchase price is simply that you don't have the deposit at hand - even though you have enough income to service the investment loan.
Will lenders give me a loan for the full value of my investment property?
It's possible, though not as easy as many investors would wish.
While there are several lenders prepared to lend 100 per cent or more to home owners, most view investment loans as a riskier proposition.
A mortgage broker may be able to swing a deal for you, but you'll need to present a good case for the high level of borrowings, and you'll probably pay a higher interest rate.
Remember, too, that you'll have to pay mortgage insurance, which can cost about 3 per cent of the value of the property. (Even home owners should be wary about 100 per cent-plus loans as the interest rates charged can be in the order of 7.5 to 10 per cent.)
But if you have other equity that you can contribute to the loan, it becomes much easier.
This lifts the security available to the lender and means borrowers can, in many cases, borrow the full purchase of their investment property plus expenses like stamp duty and purchasing costs as well.
How does that work?
It's common for investors to use the equity in their own home as additional security.
Let's say you have a $500,000 home and owe $200,000 on it.
You want to borrow $400,000 for an investment unit.
You can structure your borrowings so that you borrow, say, $410,000 for the investment property on top of your $200,000 home loan.
Your overall loan-to-valuation ratio will be less than 70 per cent, which most lenders will be happy to accept without the need for mortgage insurance.
If you have the deposit for your property, this can be used to pay off part of your home loan, which reduces your non-deductible debt.
Does this mean I need to refinance my home loan?
That's usually how it's done.
It's possible to get a second mortgage on your home to fund the investment property, but not many lenders are willing to go down this route.
When you refinance you need to find a banking package or product that allows you to keep separate accounts for your home and investment loans for tax purposes.
Some borrowers use home equity loans or other products that allow for individual sub-accounts within the loan structure, or you can structure a loan package that keeps the two loans separate.
This also means that you can direct any spare cash you have to reducing your home loan, rather than your tax-deductible investment loan.
In some cases, you may want to split the loan - for example, having a fixed rate or interest-only investment loan combined with a traditional variable rate home loan.
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