Anyone who has or has had a mortgage will agree that you would dearly love to have it paid off before the loan term is up. Whilst slashing the 30 year loan term on your home sounds very attractive, it can also be an effective part of your tax strategy.
Interest charged on your home loan for the property that you reside in is not tax deductible. However, interest on borrowings for an investment property or share portfolio is tax deductible as the interest is incurred for an income producing purpose. Therefore, from a tax point of view, it is important that you focus on repaying the personal home loan debt off faster and repay any borrowings for investment purposes last.
Take for example Sally who earns $80,000 per year. She has a home that she lives in with a mortgage of $300,000 and pays interest at 5%pa. Sally also owns an investment property she rents out again with a mortgage of $300,000 and an interest rate of 5%pa. The total interest cost after tax for Sally on each property is as follows:
Personal Home Loan Interest $300,000 x 5% = $15,000
Less Tax Deduction $0
Out of Pocket Expense $15,000
Investment Loan Interest $300,000 x 5% = $15,000
Less Tax Deduction $15,000 x 34% (inc Medicare Levy) = $5,100
Out of Pocket Expense $9,900
From this example we can therefore see that the interest Sally is paying on her investment loan is costing her far less than her personal home loan (despite all factors being equal). The best taxation strategy she can therefore implement is to reduce her personal home loan debt before focusing on the repayment of her investment property loan.