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I'm wanting to find out some details of using the equity I have in my home to invest in another property. Specifically, about the costs of the loan(s) involved. I'm currently assuming I need a separate loan for the investment property.

My main question: Does using home equity to borrow more to buy an investment property have to increase the amount of interest paid on the original home loan for the house I'm living in?

The best way I can ask this is with an example. I realise that the investment property numbers are unlikely and missing things like advertising, maintenance, occupancy rates, management fees etc, I just grabbed them from an ad. Please ignore those issues and can someone tell me if, based on the given assumptions and figures, is my math correct? Please note that I'm not going to be investing in this particular property because I see that it is a bad investment.

  • I currently have all of my available funds and equity stored in a 100% loan offset account or my home loan account as equity.
  • My current home loan has 5.14% p.a. interest rate accrued monthly
  • If I look at buying a property worth $135,000
  • with a 20% deposit of $27,000 for an investment property loan
  • paying about $6750 in fees (stamp duty, conveyancing, loan application, etc)
  • totaling $33,750 cash from offset account or equity used
  • Does this increase the amount of interest on my home loan by $144.56 per month to start with?
  • With annual investment property costs (rates, etc) of $5626
  • and with an interest only investment loan of $108,000 at 5.14% being $462.60 monthly
  • totally $931.43 monthly tax deductible expenses
  • assuming $1170 monthly rental income with 100% occupancy rate to give
  • after expenses income of $238.57 per month
  • and an income tax rate of 32.5% giving $161.03 after tax monthly income increase
  • Does this mean that, to start with, it is only $16.47 per month better cash flow than just using my home loan 100% offset account?

Is there a way to structure the loan(s) to increase this cash flow? The only way I can think of is to reduce the amount of equity used, to reduce the amount interest payments on the existing home loan go up by, while increasing the investment property loan size, with its tax deductible interest payments, giving an overall benefit. Is there a way to have a higher loan to value (LVR) on the investment loan without paying lenders mortgage insurance (LMI)? Or is LMI not so bad on an investment loan due to tax deductions and maintaining more money in my current home loan?

I'm in Queensland Australia.

  • I've updated my question to try and focus people on the main question and my calculations, rather than the assumptions and how bad of an investment those numbers represent. – BeowulfNode42 Jun 11 '14 at 11:57
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Yes. Borrowing more against your home means you will pay more interest for your home. Specifically:

Does this increase the amount of interest on my home loan by $144.56 per month to start with?

Yes, that is exactly what it means.

As to whether or not that is a good use of the money, I can't say. You're making various assumptions here... They could be accurate or, if this is your first rental home, they could be wildly optimistic (100% occupancy rate? that won't last).

Additionally, houses are physical goods which depreciate. Put another way, they fall apart, and you (as the owner) are responsible for fixing it.

You have the basic idea right, I just think you should plan for a worst-case scenario, and it looks like you're planning for the best.

  • Thank you. Yes the example I've given is a bad investment with overly optimistic assumptions. Any thoughts on the second part, about ways to structure the loan(s) differently to optimise cash flow? – BeowulfNode42 Jun 13 '14 at 8:29

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