Page 4 - Loan Structure Solutions

Part A: The basic’s

If there is one thing that the vast majority of borrowers tend to learn
through trial and error it’s how to structure their loans correctly. The
problem is; financing is deceptively simple. Your friendly banker or
mortgage broker is often so keen to sign you up to a new mortgage
that their only focus is ensuring you borrow the money via them. Well,
as the saying goes; you don’t know what you don’t know until you know
it! However, many investors don’t know much about loan structuring
and appreciate the consequences (cost) of getting it wrong. This report
aims to give you a bit of a head start and hopefully help you avoid the
costly mistakes that many investors make.

1) What’s so costly about the wrong loan structure?

A loan structure will influence many things including the interest rate
and fees you pay, the amount of tax that you pay, the amount of
flexibility you have, your access to additional finance (i.e. your ability to
invest more) and so on.

Tax-effective debt:
This is probably one of the most costly
consequences of a poor loan structure.
Two of the most common problems
include an inefficient split of tax
deductible and non-deductible debt
(i.e. home loan is too large as a
proportion of total debt) and inflexibility
of debt structure to accommodate
changes in circumstances or use of
property in a tax effective manner. Of course, we can’t be too tax-
focused when it comes to loan structuring as tax is only one of many
considerations. However, optimising your tax position will increase your
cash flow and cash flow is very important when it comes to building an
investment property portfolio.
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