Business
Property Gearing & Your Loan
2022-01-07 · 3 min read
Property Gearing can be a confusing topic.
Property Gearing can be a confusing topic. Gearing is how the asset is performing. Positively geared means that after expenses, you are cash flow positive. Neutrally geared means that you are breaking even.
Negative Gearing tends to get a lot of press; it is when you are making a loss, or the costs of owning an asset such as a rental property exceeds the returns it yields.
If your investment property is making an income, in most cases this is a taxable income. If your property is making a loss, you are typically permitted to claim the net loss as a tax deduction against your other income.
In the same way you can claim work expenses to reduce your taxable income, you can claim the income shortfall of your investment property against your taxable income.
Many investors use the strategy of claiming their losses against their tax to get into the property market early and, over time, increase their investment income to cover their expenses (as rent and property value improves).
Negative Gearing applies to residential and commercial investments, so understanding Negative Gearing can help you determine your cash flow and feasibility of the purchase when it comes to buying a property.
Everyone’s circumstances are different, so your investment strategy should consider your circumstances, goals and financial outcome. Having a team to help you can pay off as your accountant or financial planner will be able to help you understand the cash flow of any potential purchase, so you can make an informed financial decision.
Along with the cash flow of an investment, when you are deciding on your investment strategy, you may also take into consideration your:
Loan structure Interest-only or principal and interest repayment schedule the most suitable?
How do different loan terms affect your final position?
Interest rates
Consider the benefits of fixed or variable to determine which suits your goals?
Market demand or tenantability Is the property desirable for the demographic of the area? A property that suits the demographic typically will be in demand so you can minimise your vacancy periods and maximise your rental return.
Rental Management
A good rental manager can make a substantial difference in how your investment performs over the long term lowering vacancy rates, maximum rental returns and staying on top of maintenance.
Considerations for Securing Your Investment Loan
The assessment process for serviceability tends to be stricter for investment loans, and your lender may take a more conservative approach to assessing your ability to repay your loan if it is an investment.
Investment property loans may also incur a higher interest rate or require additional borrower security than taking a mortgage on a primary place of residence.
Further to this, some lenders do not consider Negative Gearing benefits when assessing your ability to afford the debt.
As your Mortgage Broker, we can work with your Financial Planner or Accountant to understand your budgets and goals and find a loan structure that suits your investment strategy. We can help you understand your loan options that suit your investment goals.
It is recommended that investors obtain specific advice before making any decision regarding their finances. Call us today or book an appointment to chat with our team about how we can help with your next property investment.
Disclaimer:
Terms are subject to approved persons only. This information is true and correct as of 25/12/2021. All of the content above is general in nature and may not suit your personal needs, situation objective & goals.