Choosing The Right Investment Loan Will Deliver Better Returns On Your Investment

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If you are in the market for an investment loan one thing you should remember is that just like your investment decision process as to which property or shares you might wish to acquire determining the right investment loan for your acquisition should be a thorough process because there is no doubt it having the right investment loan will impact positively on your ultimate investment return.

It may be that you simply feel that a standard principal and interest loan that suits a home purchase will also work for your investment property purchase. This is not the case. Most investors are well aware that taking an interest only term is for an investment loan is more tax efficient in that one avoids repaying principal and can instead apply that principal you might have had to pay on your investment loan to the reduction of any non-deductible home loan or personal debt (interest on personal debt is paid in after-tax dollars so is much more costly to you). Until fairly recently the maximum interest only period you may have been able to negotiate on an investment loan was 5 years. Today you can take an initial ten year ...
... interest only period on your investment loan and thereby keep your monthly repayments on the investment loan to a minimum during that time. By structuring your investment loan this way you ensure that should there be a vacancy with your investment property or should dividends on your shares not be as high as expected, then at least you are not digging into your salary to make the principal component repayment on your investment loan. Similarly you can put money aside for maintenance and repairs as opposed to making principal repayments on your investment loan. You may not be aware but today most interest only investment loans (or home loans for that matter) do allow a borrower to make additional repayments of principal if they so desire. This provides all the more reason to go interest only because by doing so you achieve the maximum flexibility and choice with your investment loan repayments.
The first tip for your investment loan is therefore to include the longest available interest only period on offer.

In addition to the interest only feature of an investment loan another feature you should always look to include in your investment loan package is a line of credit facility which you only used to meet any shortfall in interest (after applying rental payments) as well as any other costs that you may incur in relation to your investment property or share portfolio. The line of credit firstly provides you with a buffer - it ensures that if there is a vacancy then you are not having to rely on your personal income to meet the repayments required on your investment loan. Instead you can draw down on the investment line of credit to meet the interest payments while you advertise for another tenant. You can also utilise the line of credit to meet any one-off unexpected payments that might be required for maintenance reasons - a failed hot water system, leaking roof, or other maintenance issue can be an expensive exercise to repair and having the safety net of a line of credit cover repayment of these and any interest shortfall on your investment loan.
The second tip then is to include an investment line of credit within your investment loan package ( reiterating that you must only use the line of credit for investment use because if you draw on it for personal use then the ATO will regard the borrowing as mixed borrowings and you will need to then apportion repayments you do make between personal and investment loan debt. Utilising the line of credit for both investment and personal use also caused grief for your accountant at tax time - it can be a nightmare trying to extract what is investment loan debt vs personal debt when calculating what is tax deductible and non-deductible interest.
The other unique feature of an investment loan that not many investors consider is a capitalising line of credit. The importance of the capitalising feature can not be underestimated. A capitalising line of credit (not all banks will provide these so you