As with any financial strategy, the right loan structure for any investor depends on their individual goals and circumstances, and getting professional advice is very important.  However, here is an overview of some of the strategies adopted by investors.

1. Repay high interest debt first

This strategy is often adopted by investors who have a mortgage on their own home, as well as on one or more investment properties.

The interest you pay on the mortgage on your investment property or properties is usually tax deductible; however the interest you pay on the mortgage on your own home is not.  That means that your personal home loan is generally more expensive.

For example, an investor with a $200,000 loan at an interest rate of 10.55% on their own home would generally pay $21,100 in interest per year.  In comparison, the interest costs on the same loan at the same rate for an investment property would be $12,871 (assuming the investor’s tax rate was 39% and all the interest was put towards a tax credit).

Many investors in this situation place their investment loans on interest only terms to free up income towards repaying their personal home loan first.

2. Using rental income to reduce interest costs

This strategy requires a Flexible Home Loan.  Interest is calculated on the average daily balance, so by depositing all your income (including your salary and your rental income) into your Flexible Home Loan account and keeping it there until you need it, you can reduce your average daily balance owing on your home loan.  As interest is calculated on your daily balance, this will therefore reduce your overall interest costs.

Key to this strategy is resisting the urge to simply borrow up to the credit limit of your Flexible Home Loan account for other spending.  You need discipline for this approach to succeed.

3. Spreading your interest rate risks

This can be an effective strategy for investors who are highly geared, and may be very sensitive to any increase in home loan repayments if interest rates rise.

These investors can spread their interest rate risk by taking out a variety of Fixed Rate loans over different periods, at different fixed interest rates.  This effectively ‘averages out’ the interest rate to give the investor some certainty of repayments, while leaving some flexibility to take advantage if interest rates fall. For example:

       Loan                                                 Interest Rate     Loan Amount    

• Floating Rate                                 10.95%                 $30,000   
• 1 Year Fixed Rate                            9.70%               $150,000    
• 3 Year Fixed Rate                            9.40%               $200,000

       Total Loan                                                                          $380,000   

       Weighted Average Interest Rate         9.68%

This material is for information purposes only. You should seek professional advice related to your individual circumstances. While The National Bank has taken care to ensure that this information is from reliable sources, it cannot warrant its accuracy, completeness or suitability for your intended use. To the extent permitted by law, The National Bank does not accept any responsibility or liability arising from your use of this information. Our lending criteria, terms, conditions and fees apply.