When we bought our investment property we initially paid off as much as possible, even though the interest was tax deductible. We had borrowed 80% of the value of the property, and at that time the amount we had borrowed seemed huge. After a few years the boom in Sydney property prices meant we had considerable equity in the property, and the drop in interest rates and slight increase in rent meant that the property was no longer negatively geared. Then when we bought our own home we changed the investment property loan to interest only as we wanted to reduce the balance of our home loan as quickly as possible because the interest on your own home loan isn't tax deductible in Australia, so any amount paid of the home loan is equivalent to an investment paying the home loan interest rate after tax. More recently we have changed our home loan to "interest only" as it is more tax effective to make pre-tax salary sacrifice contributions into our superannuation accounts since the latest tax changes mean that retirement payouts from our superannuation fund will be tax free once we are retired and over 60. Better still, if investments aren't sold until the superannuation account has switched into pension mode, there will be no capital gains tax liability either.
When making home loan decisions it is important to understand the various payment options, terms and conditions available, so you can select the most appropriate type of loan and loan provider for your situation. It also important to know when it may be worthwhile looking at fixed rate mortgages - bearing in mind that lenders will offer rates based on how they expect interest rates to move during the fixed rate period.
UK readers may wish to compare mortgages to determine which loan suits them best. Those considering an investment in real estate may want to learn about buy to let mortgages.
Copyright Enough Wealth 2007