People have been buying investment properties for as long as they have been building houses. There are many reasons people choose this form of investment – everything from additional stable income, capital gains from increases in value, tax benefits, solid retirement plan or being a relatively safe form of investment (compared to say shares). It is becoming more and more popular of late as people understand more about it. “Negative Gearing” (see below) is the magic phrase most often used.
Investment property purchases and investment loans are often mis-understood. The costs involved in purchasing an investment property are fundamentally the same as for any other type of home. And, an Investment loan is fundamentally the same as a regular owner-occupied home loan. So, what is different about it?
In the Australian market, there are currently two crucial differences in investment loans:
Since 2015 investment loan have had a slightly higher interest rate than owner occupied home loans. Typically, this is around 0.20%-0.40% across variable and fixed rates. There is no hard rule governing this. The difference is to address the perceived higher risk in investment properties.
Also, since 2015 the banks have progressively tinkered with assessment and lending policy, which has resulted in investment loans being slightly more stringent. For example, many lenders have lower maximum loan to value ratios (LVR), some are using less rental income for assessment purposes and some are even slowing down or stopping investment lending for a while due to regulatory pressures.
Identifying the right loan for you is where we can help. We can help with mortgage planning so that you are matched with the necessary loan and accounts to maximise your returns. The loan doesn’t have to be with the same bank as you have your owner-occupied loan with. It doesn’t need to be with the bank you do day-to-day transactions with. Discounted investment loans interest rates are still available, and some are very competitive if you know where to look.
Debt plays a key role in people’s investment property decisions because of the cash flow (great if rent covers loan and running costs) and tax consequences (small cash costs can be turned into a positive due to lax losses).
We are not legal or tax advisers, so please seek professional advice if you need it. That said, we do understand a lot about both of these. In addition, we can help with strategic planning to lock in low interest rates or to ensure you achieve maximum tax deductions from the investment loan.
There is a common misconception that the property which is being used as security for the investment loan is the important issue, but in most cases this is almost irrelevant. When determining whether interest on a loan is tax deductible it is critical to know what is the purpose of the loan, as this will determine whether the interest is tax deductible. For example, you can borrow against your owner-occupied residence and use these funds to purchase an investment property. The security for the loan is your home but the purpose if investment which should entitle you to a deduction on the interest on this loan. This is why most people elect to have interest only repayments as the interest is deductible but the principle is not.
Also, did you know that for married or de-facto couples you can buy the property in just one name but have the loan in both? It means you can get the benefit of double incomes but only the owner gets the tax benefits.
Negative Gearing (this description is borrowed from the ATO website)
A rental property is said to be ‘negatively geared’ where the deductible expenses (including interest on the loan borrowed to finance the property) exceed the income earned from the property.
The overall tax result of a negatively geared property is a net rental loss. In this case, you may be able to claim a deduction for the full amount of rental expenses against your rental and other income – such as salary, wages or business income – when you complete your tax return for the relevant income year. Where the other income is not sufficient to absorb the loss, it’s carried forward to the next income year.
You will need to show the total net rental property loss on your tax return. The amount of the loss is included in your adjusted taxable income and may be used in calculating various tax obligations, tax offsets and entitlement to other tax related concessions.
What Are Investment Property Expenses?
You can claim expenses relating to your rental property but only for the period your property was rented or available for rent. This is then offset against the rental income received. The list of items you can claim tax deductions for is as long as your arm. The ATO website has many resources available to help.
Expenses could include:
interest expenses for the investment home loan
body corporate fees and charges
advertising for tenants
decline in value of depreciating assets
gardening and lawn mowing
insurance – building, contents and public liability
legal expenses (excluding acquisition costs and borrowing costs)
property agent fees and commissions
repairs and maintenance
stationery and postage
travel undertaken to inspect or maintain the property or to collect the rent
If part of your property is used to earn rent, you can claim expenses relating to only that part of the property (usually based on percentage of floor-area).