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Should you borrow against your own house?

Most people try to pay down their home loan as fast as they can. It is, after all, often considered to be 'bad debt'. But have you ever considered actually borrowing against your home and increasing the debt?

Jane Slack-Smith of Your Property Success says we've all been taught by mum and dad to pay off debts as quickly as possible, but in some cases it's better to do the exact opposite.

'If you have a $500,000 house with a $200,000 home loan, the interest isn't deductible,' she says.

'But if you pull out $100,000 to put a deposit on an investment property, that's deductible because the purchase is for an income-earning investment. That's why mortgage brokers set up split loans, because the lending of the original loan isn't tax deductible. But lending against new loans for investment reasons is deductible.'

In fact, Slack-Smith believes many investors are better off keeping their home loan on interest only and never reducing it. She says the average Australian moves or changes their home every seven years, so why not treat your home like an investment when you upgrade down the track.

'You only get one chance to set your investment loan up right and that's in the beginning. Think long-term and allow yourself options.'

She adds investors should use the extra cash to establish an offset account, which would still help them to keep their interest repayments lower, but also allow them to build up a cash buffer faster.

'You get no cash flow benefit paying principle and interest. But if it's interest only and you have an offset account, your interest is reduced to reflect that money in the offset account. It means you can save faster and potentially buy another property and you still get the (lower repayment) benefit for the original loan.'

Slack-Smith adds those who put extra money into their home loan each week might think they're doing themselves a favour, but they're only reducing the term of the loan by a few years, or saving a little bit of interest. On the other hand, if you maximise your loan and even take out mortgage insurance, you can use the rest of the cash for another investment.

'If you take out a 90% loan, you'll have the cash to buy the next property sooner,' she says.

However, author and director of Property Investing Steve McKnight says investors should consider the consequences of what could go wrong if they tap into their own home loan.

'If you choose the wrong investment, you may be better off not doing it,' he says.

'People shouldn't risk what they don't want to lose. Borrowing too much against the family home is a strategy fraught with danger. You may need to do it (borrow against your house) to get started, but don't rely on it. Refinance your investment, not your home, if you have to.'

Reproduced with permission. Australian Property Investor magazine. 'Should you borrow against your own house?' 31 October 2011.