The best way to borrow for an investment property

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In terms of interest-only, for a time these loans became common not just for investors but for owner-occupiers, too.

The problem with not paying principal on the loan is that you are relying on price growth to build equity in your property. And you do eventually want to pay it off.

In my opinion, an owner-occupied mortgage should be held on a principal-and-interest basis, where a bit more becomes fully yours with every repayment.

A home loan is debt that is non-tax-deductible, so you cannot claim deductions for the costs you incur, including interest.

Having said that, there is a right and wrong order to pay off multiple properties and to do so quickly and cheaply within the tax system. That’s where interest-only loans may play a part.

Because you can claim tax deductions on an investment property, it can be a wise move to pay only the interest on any debt until your own home is fully repaid. This way your deductible debt – and your tax deductions – remain high, while you can mobilise the most money possible to pay down the personal debt that’s doing nothing but dragging you back.

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A lot will depend on your tax rate. Bear in mind, too, that investment loans and in particular interest-only investment loans attract premium interest rates because regulators were keen to stop so many of them being issued.

There is one further twist as well. Any extra repayments you make on your home loan should be going into a mortgage offset account that runs alongside of it. This way you retain full access and also the flexibility to convert your now-home into an investment property further down the track.

Firstly, you have your deposit for your next home sitting there in the offset. Secondly, you have not forfeited investment property tax deductions by paying down your principal more than required.

However, reduce your home loan debt fast – with excess payments going into the offset account – and you stand to save a fortune in interest.

You may even be able to find an investment property in the regions that is positively geared, so generates surplus money to help you achieve that end.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me. Follow her on Facebook, Twitter or Instagram.