First Investment Property

The Broker’s first discussion centred on good debt versus bad debt. In simple terms, home loan debt is ‘bad debt’ because it is paid with personal funds (after tax has been paid) and the interest on the home loan is not tax deductible.

Investment debt is deemed to be ‘good debt’ as the interest paid on the loan is tax deductible. Given both clients incomes were in the highest tax bracket, it was important to maximise the tax benefits available to owning an investment property.

For this reason, the advice was to use the savings to pay down the home loan (bad debt) using $70,000 and to keep the additional $10,000 in an offset account linked to the home loan as a personal buffer given, they were extending themselves financially with a new property.

With the home mortgage paid down to $550,000, the clients now had $400,000 of available equity in their home.

To maximise the ‘good debt (investment loan) it is possible to borrow 100% of the Purchase price ($500,000) plus purchase costs ($30,000).

Thus, two loans were obtained:

• Deposit loan of $130,000 secured against the home* (20% Deposit + Purchase costs)
• Purchase loan of $400,000 secured against the new investment property (80% balance of purchase)

*Even though the deposit loan is secured against the home (which is not an investment asset) the debt is tax deductible as the purpose of the loan was for investment. It is the purpose of the funds that dictates the tax benefits, not the type of asset that secures the loan.