Investors have different objectives- Guardian Property Specialists (GPS)

The strategy: to work out the best way to structure my investment property borrowings.

Are they any different to a normal home loan? Most investment loans look the same as ordinary home loans, but investors have different needs to home buyers and so are likely to have different borrowing requirements. Most home buyers, for instance, want to pay off their loan as fast as possible. But Nicholas Gruen, the managing director of Peach Home Loans, says investors often prefer to take out interest-only loans and make no principal repayments.

There are a few reasons for this. Firstly, if you still have a home loan outstanding, Gruen says it doesn't make sense to be reducing the principal on your tax-deductible investment loan when that extra cash could be used to reduce your non-deductible home loan. Once the home loan is paid off, you can reconsider your options.

Some investors prefer to stay on interest only to maximise their borrowings and tax deductions; others like to build equity in the properties so they can be retained as an income-producing asset in retirement.

The new super regime also will open up the potential for other strategies to be considered, such as salary sacrificing into super the cash that you would have used for principal repayments on your investment loan, to take advantage of its concessional tax rates.

This can generate a larger lump sum at age 60 which can be used to repay the debt on your investment loan if you want to keep the property. (See I Can Do That, July 26).

Is it hard to structure an interest-only loan? Gruen says interest-only options are widely available and are generally available at the same interest rate as principal and interest options. Investors should be able to set up a loan that will allow them to switch between the two options if desired.

Can I suspend repayments on my investment loan altogether while I pay off my home loan? That's a thorny issue, following the High Court decision on the Harts case a few years back. That decision found loan packages where interest on the investment portion could be capitalised while all repayments went to reducing the home loan to be in contravention of the anti-avoidance provisions of the Tax Act.

But Gruen says the case revolved around the artificiality of this type of loan package. It did not say investors couldn't capitalise interest on their loans. Theoretically this leaves an opening for investors to structure their loans so that interest is capitalised on their investment loan for a period while they concentrate on paying off a seperate home loan.

Gruen says you'd need to tread very carefully and you probably wouldn't want to direct your rental income to repaying the home loan. It's much safer to simply stick with an interest-only investment loan.

Should I use a home equity loan to buy my investment property? It's one option, but Gruen says it is often simpler (and cheaper) to set up a separate investment loan. This way you can quarantine which part of the loan is for investment and which part is private, making it easier to claim (and defend) your tax deductions.

He says if you want to use the equity in your home as part of the deposit on your investment loan, you can simply draw down the amount needed.

Does it make sense to go for a high loan-to-valuation ratio on my investment loan? Gruen says lenders have certainly become more generous with the LVRs on investment loans. Many will now lend up to 95 per cent of the purchase price and some will lend 100 per cent. If you borrow more than 80 per cent (in some cases, 85 per cent), he says you'll generally have to pay for lenders' mortgage insurance, which is about 3 per cent of the valuation.

It's really a question of how highly geared you want to be, and how much growth you believe the property will generate.