What's the Best Way to Structure Our Mortgages?

Excellent question.  Let's assume you have

1. Your own home, with a mortgage
2. A rental property, with a mortgage

What do you want to achieve? In order of priority:

1. Pay off the family home
2. Ummm, I haven't thought much past that.

Don't panic! We can help.

So, how should you structure things to obtain this 
no. 1 objective as fast as possible?

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Why You Should Pay Off the Mortgage on the Family Home First?

Now, at this point you may be wondering why you should do that.  Well, it comes down to "good debt vs. bad debt."  What do we mean by that?

Good debt
This is tax-deductible debt. Debt on your rental property is tax-deductible. So it is "good" debt in that it is working for you. 

Bad debt
Debt on your family home is not tax-deductible (although if you run a business from home then a small portion will be), so it does nothing for you. It is "bad" debt from this point of view.

So, logically, you want to drive down the "bad" non-deductible debt as soon as possible, and give this priority over debt that is working for you

How Should I structure my mortgages?

Here are our six key recommendations:

1. Have the rental mortgages on interest only (not interest and principle)
   
2. Have your home mortgages on interest and principal
3. Have a floating interest rate mortgage transaction account for the rental out of which all bills are paid/other rental loans funded/rent comes into, e.g., $30,000. Some banks allow this.
   
4. Have both your personal and rental lending split into 2-3 loans e.g., 3 year fixed, 5 year fixed, 1 year fixed.  This gives you options re interest rate changes
   
5. Hit the bank up for a contribution to legal fees; typically this is $2,000-3,000
   
6. Insist on weekly mortgage repayments. It'll reduce the amount of interest you have to pay
   

Can EpsomTax.com organise that for me?

No. That's what a mortgage advisor does. We recommend that you have a talk to Velocity Financial.

Other Questions

What's the benefit of selling my rental to an LTC?
There are numerous benefits, but one key one is that it allows you to increase good debt and decrease bad debt. This is because you can sell the rental to the LTC at market value (you'll need a registered valuation), and then adjust the mortgage upwards on the LTC in line with that value, and readjust the mortgage downwards on your own home.  The end result is that the total mortgage amounts are the same, but you've now in effect turned a lot of bad debt into good debt.  Note that in some circumstances you can simply revalue without needing to set up an LTC.  Talk to us about your options.

I want to buy a better family home or upgrade it. Is that borrowing tax-deductible?
No. For interest on loans to be tax-deductible there has to be a business purpose.  However, if structured correctly, then extra funds can be raised for a business purpose.  Again, talk to us about this.

What do I do after I've paid off my family home?
Well, even before you've paid that off completely you have options. You might be surprised at how soon you have equity in your family home and in your rental. This allows you to leverage into another property.  However, you are best to get advice from an Authorised Financial Advisor about this. They are the only ones who are licensed to give you specific financial advice.  Contact us for more information.

Is an LTC the right structure for my rental investment property?
Probably. Watch this short video, then call us to discuss your specifics on 0800 890 132.

Do you have any other information on this stuff?
Yes, check out our FAQ page and also these blog articles