Blog » Investment and Personal Mortgage Structure – Why should they be treated differently?

There is considerable confusion generally as to how mortgages should be structured in order to gain maximum efficiency.

Efficiency is determined by many facets including, tax efficiency, fees, interest rates, flexibility and useability.

Many Banks and Mortgage Brokers will consider most of these factors however often not all of them are considered or understood when it comes to tax implications and maximizing internal rates of return on investment.

There are two fundamental principles that are extremely important to remember which are :

1. When using collateral or security for a loan for investment, the tax deductibility of the loan is not determined by the collateral used but by the actual use of the money loaned.

Therefore if you use your main residence as security for the purchase of an investment property or equities portfolio, the ability to claim a tax deduction on the interest is dictated by the destination of the funds and not the security being used.  Tax deductibility is determined by whether the investment is anticipated to generate taxable income.

2. Generally investment loans and non investment loans should always be kept separate or identifiably separate such as sub accounts.  Why is this?

In light of the tax deductible nature of an investment loan and therefore a lower net cost, it has lower priority for repayment than a non tax deductible loan such as with your main residence.

If you consolidate your loans together a percentage of the loan is determined to be investment and a percentage personal.  When a monthly repayment is made this is apportioned between the two components and will remain so for the life of the loan.

In most circumstances but not all, it can often be worthwhile to run an investment loan interest only whilst increasing the repayments to a non tax deductible loan thereby improving the efficiency and overall cost of the loans.  This can only be done if the loans can be treated and identified as separate usages.

Other considerations are whether to use a Line of Credit or a Mortgage Offset – what is the main difference?

The main difference between these facilities is that whilst they can achieve the same outcome, one enforces more discipline than the other. 

A Line of Credit is one account which generally would receive all of your income and would also be your everyday account from which you draw your funds and pay your bills.  A level of credit is allotted to the facility and as long as you are within that limit the bank is happy. 

The problems that can arise is that you can use all the credit regularly just like a credit card and effectively not be systematically paying down the loan.

A Mortgage Offset account however is an account that is separate to the mortgage, but whatever funds you hold reduce the interest on your personal mortgage.  Every month a defined repayment is paid across to the mortgage thereby ensuring a regular actual repayment and therefore imposes discipline.

As you can see mortgage efficiency and tax efficiency can be two separate issues and it is important to seek financial advice regarding structure in conjunction with mortgage advice in terms of options. 

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