paying off your non-deductible housing loan

It’s well known that paying off your non-deductible housing loan should be one of your first priorities, but I am continually receiving questions about the best way to pay off investment loans where the interest is tax deductible.

The decision is an easy one if you have both a housing loan and an investment loan, because the lack of deductibility of the interest on the housing loan means that the real cost of the payment could be as much as twice that on the investment loan - the former is paid from after-tax dollars and the latter is paid from pre-tax dollars.

Without question, keep your investment loans on an interest-only basis until that non-deductible housing loan is out of the way.

Once you’ve reached the stage where the housing loan is paid off, you then have to decide between making principal and interest (P&I) repayments which will see the loan reduce each month, or using interest only where the balance never reduces. Both strategies have merits.

If you are trying to create a safety cushion for yourself and also put yourself in a position where you want to buy more investment assets a P&I loan is a good way to start.

Every month your equity is building as the loan reduces, and you are also giving yourself a good safety cushion against rates rising. Then, as your equity builds, you can borrow for more shares or property.

However, if you are 45 or more, a much better strategy may be to leave the loan on an interest only basis, and salary sacrifice as much as you can afford into superannuation.

This will create additional funds in superannuation that can be withdrawn tax-free at age 60 to pay off the investment loan. In the meantime, you get to enjoy the benefits of the tax breaks of negative gearing.

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