Private Wealth

  • Date:01 Dec 2007
  • Type:CompanyDirectorMagazine
First Permanent managing director Ian Grant explains why choosing the right investment loan is as important as timing.

How to gear your investment property

Like most things in life, timing can be everything. The US subprime mortgage crisis has had a devastating effect on share markets around the world. For many, the gloss has come off equities as an asset class leaving residential property investment as a logical alternative. The Sydney and Melbourne residential property markets are both showing signs of recovery since peaking in 2003 and then declining for several years. Residential property has bottomed and is now experiencing an investor led recovery.

Residential property investment – recovery indicators

  • Rental vacancy rates are well below two per cent in Sydney, Melbourne and Brisbane. This is now leading to healthy rental increases;
  • Auction clearance rates are up. September clearance rates for Melbourne were 82 per cent; in Sydney they were 68 per cent;
  • Many properties are selling well in excess of their reserve prices; and
  • New lending for residential property investment for August 2007 alone was $7.346 billion.

Selecting the right investment loan is as important as the timing of your investment decision. Investors should therefore choose an investment loan that maximises their negative gearing benefits as well as return on equity.

Three golden rules

1. Contribute as little cash (equity) as possible towards the purchase of the investment property. That way, the tax deductibility of the interest payments (negative gearing benefits) will be maximised and return on equity increased.

2. Avoid having to give the bank additional security such as a mortgage over the family home to support the mortgage over the investment property.

3. Chose a loan with an ‘Interest Only’ option to maximize the tax benefits derived from the investment. Remember, interest payments are tax deductible – principal repayments are not.

Investment loan obstacles and options

A key objective of negative gearing is to put as little equity as possible into the investment property. While some lenders will provide 100 per cent of the property’s value, they will expect full payment of stamp duty and lender’s mortgage insurance. That means substantial inital cash outlays. These expenses are significant. For example, the stamp duty payable for the purchase of an existing $400,000 investment property in Victoria is $19,659.94. Even if the bank lends 100 per cent of the purchase price, substantial amounts of cash still have to be found to pay the transaction costs.

In addition, most 100 per cent lenders will require ‘additional security’ such as a mortgage over the family home or other property. Putting up the family home as security for an investment property doesn’t sit well with many people and is often the key reason why they choose not to invest in property at all.

However, investment loans are available that overcome many of the problems raised above and satisfies the three golden rules when choosing an investment loan.

First Permanent, a subsidiary of Merrill Lynch, has recently launched Investorloan PLUS which lends the full purchase price of the investment property plus all the stamp duty costs. The only security required is a mortgage over the investment property.

First Permanent also offers three years interest only and three year fixed rate loans. The current headline interest rate is 8.8 per cent per year, which is only 0.5 per cent higher than the major bank’s published standard variable rate for owner occupied mortgages with a deposit. The loan is fully documented and designed to suit those on higher incomes who are seeking to maximise the negative gearing benefits of property investment.