A recent announcement by Westpac Bank of a new 30 year interest only loan has drawn fire from some quarters, but Brent Smith, Managing Director of Iron Bridge Property Group says “about time”.
“Over the years we have been frustrated with the banking world insisting on offering investment property loan terms of 2 or 3 years interest only, then automatically converting the loan to principal and interest. Now, you might wonder why we think this isn’t sensible – isn’t the idea to pay back debt? The key is in understanding the difference between good debt and bad debt."
The mortgage on your own home is seen as bad debt as payments are not tax deductable – on an investment property however, it can be looked upon as good debt, as it’s a tax deductable expense, so that money is working for you.
Brent says “Most often, our investor clients have non-deductible debt on their own residence, and although their equity allows them to purchase an investment property, the debt that must be repaid first before any investment debt, is the personal home loan. Inflicting a principal repayment regime on an investor before they have extinguished all non-deductible debt is simply poor tax planning,” he says, with investors having to use funds to pay off investment debt rather than clear more non-tax-deductible personal debt.
Until now, an investor’s only option to escape unnecessary repayment conditions, has been to change banks, just to buy another 3-5 years of interest only time, until that bank too insists on capital repayments. So this new 30 year interest only offer, really is a groundbreaker in the industry.
In all likelihood, 30 years interest only will not be required by most investors. The reality is that rents will have quadrupled in 30 years with inflation at less than 5% over the entire period. So for prudent investors, once all their non-deductible debt is gone, moving a portion of the investment debt to some form of revolving credit or line of credit that allows the debt to be reduced from the increasing rents over time would be wise. At the end of the day it’s up to the investor – but this way it’s their choice, rather than something imposed just 2-3 years into their property investment term.
If you’d like to know more about correctly structuring an investment property purchase, do talk to us, especially if you still owe money on your home. We’re passionate about property investment and we’re here to help, with over 10 years experience in the industry.
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