We are often asked about the best way to structure mortgages between the family home and a rental property.
A lot of residential property investors have mortgages on their family home and on the rental property. Most people want to prioritise paying off any debt on the family home first and that seems to us to make good sense. After all, financial security for the family is essential.
Another consideration is tax. The interest you pay on your home is not deductible whereas the interest you pay on the rental property mortgage is. The only exception to the rule is if you claim a small portion of your home expenses as a home office and offset this against business income. Assuming that you don’t, the interest you pay on your home’s mortgage has no benefit to you whatsoever.
So not only is eliminating the mortgage on your residential property important for the security of the family it is also tax efficient.
So how can you maximise your tax advantages on the rental property?
1. Maximise the interest paid on the rental property. Keep the equity in your own home. This could even mean opting for an interest only loan where you don’t pay down any principal. The more interest you pay, the more likelihood that the property will have a low or negative profit.
2. Minimise the interest paid on your home. Go for a mortgage that allows you to pay down the principal along with interest.
3. Diversify to spread risk. Interest rates go up and down all the time. Consider splitting your loans (both home and rental) so that you have a mixture of fixed interest and floating interest.
Even if you prefer to have all your lending at a fixed interest rate check out the possibility of having more than one loan on the property. Perhaps consider one year, three years and five years. That way you can hedge your bets and spread the risk of interest rate shocks.
4. Pay weekly on your home loan. This will significantly reduce the amount of interest you pay and you should insist on it.
The mortgage market is really competitive at the moment. Banks are open to suggestion so consider asking them to pay for the conveyancing fees from your lawyer or the cost of establishing an LTC with your accountant if that structure is appropriate. You can read more about rental property structures in a previous blog post by clicking here.