Borrowing for first investment property

[Anji]

Is it better to keep a mortgage on the property I live in and pay deposit on investment property or pay off my home mortgage and borrow as much as I can for investment property? I am purchasing a rental property for the first time and intend to keep for a few years. Someone told me it would be better to pay my home mortgage off first. Both properties are in Auckland.

[BigRedDog]

You can claim the interest on your rental as tax deductible.

Most accountants will advise you to have interest only loan for your rental until your own home is paid off.
That way you can maximise tax deductible interest.

also speak to a professional accountant as they will look at ways you can structure your loans to ensure as much of your total loan is on the rental as possible.

[gavinc]

Pay off your own home if you have the money now and then get a new mortgage for your rental property. If you cannot pay off your own home now still best to get a new mortgage for your rental so that your rental property and own home interest payments can be separated for
tax purposes.
I personally do not like interest only loans as suggested by BigRedDog - interest rates are historically low now so I think paying down some of the principle at a low interest rate is easier than doing it when interest rates are high.

[BigRedDog]

Hey Gavin I don't like interest only loans either... I hate them even though I have one currently.

I was working on the assumption that Anji won't be able to pay off his/her home mortgage before buying an IP.
Doesn't make sense to me to pay some principal on your IP's loan when you can be paying the principal on your own home loan.

Depending on circumstances, it is possible to structure your loans so that both your home loan and new loan for IP can be used for the IP which is great for tax benefits.

[Rosco]

Hi Anji,

You always pay the lowest interest rate first.
So say house loan is 6% and rental loan is 6%.
Rental loan is tax deductible, so at 33% tax rate, the 6% less tax is really only costing you 4%.

So it is best to pay of the 6% loan on your personal house first.

Interest only on the rental does make sense, until you have paid off your personal house. So still pay of the same principal you would on both loans, but just pay it all to your personal house loan. So you are reducing your loans by the same amount, just being tax effective!

Ross