There are many different ways to structure
your loan when purchasing an investment property,
and the way you choose to structure your loan
will have a significant impact on the return
on investment that you achieve on your investment
property, it is important to get your loan
structure right, and to choose the loan structure
that is best suited to you.
Hi I’m Ryan Mclean I’m from positivecashflowaustralia.com.au
where we teach people like you, how to find
and invest in positive cash flow properties
all over Australia.
Principle and interest, interest only, variable
rates, fixed rates, buying your own name versus
buying jointly with a partner and what about
investing using trust structures. All of these
different loan structures will have an impact
on the way you make money in property and
how successful your property investment is
going to be.
Let’s have a look at the different loan structures
that you can use and then you can go and assess
which loan structures is going to be best
for you, just a quick disclaimer that I’m
not a financial advisor please speak to a
professional mortgage broker or financial
advisor when making a loan structured decision.
Let’s first look a principle and interest
versus interest only and then we will go on
and look at variable versus fixed interest
rates.
What is a principle and interest only loan,
principle and interest loan sorry? A principle
and interest loan is when you are paying the
interest generated on the property that the
amount that the bank is charging you for having
the loan, but you are also paying down some
of the principle, the principle is the amount
of debt that you owe on your mortgage., with
the principle and interest loan you are paying
the interest and you’re paying down a portion
of your mortgage at the same time.
With the principle and interest loan you will
usually sign up for a fixed term, what that
means is that you’ll sign up may be 20 years
or 25 years or 30 years and what that means
is that within that time frame that is how
long it will take you to pay off the loan
fully.
The benefits of principle and interest loan
is obviously that overtime your interest decreases
because the value of your loan decreases and
eventually the loan is fully paid of meaning
you own the asset completely and your cash
flow gets a boost because you no longer have
to pay a mortgage. This can be great if you’re
risk adverse or if you don’t want the fluctuations
of a loan because if your loan is completely
paid off then you own that asset yourself
and the bank has no control over that.
Interest only loans are exactly what they
sound like; there are loans where you only
pay the interest on the property. In these
circumstances the bank charges you the interest
for having a loan and you pay that interest
but you don’t pay anything off the principle.
If you have an interest only loan for five
years then at the end of five years the value
of your mortgage is going to be exactly the
same as what it was at the start of that loan,
because all you’re paying is the interest
and the bank fees.
The benefits of interest only loans for investors
and why many investor choose interest only
loans is because interest only loans can maximize
your cash flow in the beginning. With the
principle and interest loan you are paying
interest and then you are putting extra money
on to the loan as well, with an interest only
loan that extra money gets scaled back and
you actually keep that in terms of cash flow,
your monthly repayments are going to be smaller.
This can mean the difference between having
a positively geared property and a negatively
geared property in the beginning; many investors
choose interest only because it decreases
the amount of money they have to pay and increase
their service ability of that loan and other
loans in the future.
Another benefit of interest only loans is
that they maximize your tax deductions over
time, because your mortgages staying the same,
ideally your interest is staying the same
expect when interest rates change and therefore
you are claiming the full amount that you
can of that interest in a tax deduction, with
a principle and interest loan over time your
mortgage goes down and your interest go down,
what you can claim as a tax deduction goes
down overtime as well.
Interest only loans can be great for maximizing
those tax deductions, many investors will
take the money that they would’ve spend on
the principle of that investment property
which will lower their tax deductions and
they use that money elsewhere. That’s something
to consider but obviously speak to a professional
before you go ahead and make any of these
decisions.
This is not to be considered financial advice
but educational purposes only.
There we have the differences between principle
and interest only, now let’s look at fixed
versus variable loan structures, and we will
go into part two and we will look at buying
your own name versus buying your jointly and
we will also look at trust structures as well.
Fixed versus variable what are the differences
and what are the benefits of each, first let’s
look at variables which is the most common
way people structure their loans. A variable
interest is just as it sounds its variable
it can change over time, as interest rates
change in the market your interest changes
as well, if interest rates are going down
then your interest rates will go down and
the amount of money you have to pay will go
down as well.
If interest rates are going up then your interest
rates will go up and then the amount of money
you have to pay will increase as well. Variable
rates are great because you’re maximizing
the savings if the market goes down and you
can also pay off more money on your mortgage
than if you have a fixed loan as well.
If you get an extra influx or you get a bonus
and you want to pay off your mortgage faster
than variable loans tend to allow you to pay
extra money off your mortgage. A fixed loan
is just that it’s a fixed loan, you fix the
interest rate it can be for one year, two
years, three years, five years, five years
is generally the maximum that people do fix
loans for, I’m sure there are some lenders
there that offer a longer term fixed loans.
With the case of a fixed loan, what that means
is that your interest rates stay the same
but there are also limitations on your loans
as well. Fixed loans can be great because
you know exactly what you are going to be
paying every single month, you can predict
your cash flow in advance and what you will
have to pay in advance.
Fixed loans do have their limitations because
you can only pay the amount that is set and
generally you can’t pay on top of that or
you’re limited in the amount of money extra
that you can pay off your loan, it’s much
harder to pay off your loan faster if you
have a fixed loan versus a variable loan.
Another benefit of fixed loans is that if
your interest rates go up then your loan is
set your loan is fixed and you are maximizing
your benefits there because you are getting
a lot of interest rates than everyone else,
there is fixed and variables I hope that gives
you some idea.
You need to look at when choosing your loan
structure, you need to look at whether you
want to go principle and interest or interest
only, and whether you want to go variable
or fixed, a lot of investor will start with
interest only and then what will happen is
overtime the rents of their property will
go up and their cash flow will improve, and
then they will shift from interest only to
principle and interest and they will start
to move some of that cash flow to pay off
the loan overtime.
A lot of investors do that go interest only
and then move it to principle and interest
but what you do is up to you and then there’s
fixed and variable. Some investors choose
to go half or to fix the portion of their
loan and make a portion of their loan variable
that they can still pay off some of their
loan faster even though they have a portion
fixed.
A lot of investors go with that route as well
but it’s really up to you, I do suggest speaking
to a mortgage broker or to your financial
planner, and to see which loan structure is
going to be best suited to you, this should
give you some ideas and at least be your starting
point of what you have to choose from.
If you want more videos, articles or podcasts
just like this one then head over to positivecashflowaustralia.com.au
or if you are on your mobile phone you can
type in pca.im which is a short link that
will take you directly to the website. Until
tomorrow which is when the next episode is
coming out stay positive,

What Investment Property Loan Structure Should You Use? (Ep61)

One thought on “What Investment Property Loan Structure Should You Use? (Ep61)

  • January 29, 2016 at 6:24 pm
    Permalink

    Thanks helpdful. I own a small business and looking into getting some rental apartments in Ca.

    Reply

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