Life Stages > Buying a rental property

Buying a rental property

Alex and Megan are buying a rental property for $300,000. They’ve inherited $30,000 and plan to use this as a deposit. They still have a mortgage on their own home.

When they go to a mortgage broker to find an investment loan, she suggests they do it differently. The broker points out that interest on a loan borrowed for investment purposes is tax deductible, but interest on their own home loan isn’t. This means that they would be better to use the $30,000 cash to reduce their own home loan. They could then borrow $30,000 against the equity in their home to pay the deposit.

They still end up with the same amount of debt in total. But the broker’s suggestion would make more of the debt interest tax-deductible, potentially saving the couple thousands of dollars.

Glossary: investment
A way to use your money to make it grow.
Glossary: interest
Money paid in return for the use of money. If the bank is using your money (in a savings account) they pay you interest. If you are using the bank's money (via a loan), you pay the bank money.
Glossary: equity
The amount you would get if you sold an asset and paid back any money you owed on it. For example, if you have a house worth $350,000, and a $300,000 mortgage, your equity in your house is $50,000.
Glossary: debt
Debt is what you owe - it comes in many forms, including mortgages, personal loans, credit card balances, hire purchase agreements, loans from family.