Thinking of structuring my home this way

In answer to your first question, the interest portion will be tax deductible while it is being rented out, along with council rates, water rates etc.

Im thinking of buying my PPOR and renting it out for about 5 years. In the meantime, my partner and I will be making massive repayments to the loan so that it will be paid out hopefully in 5-8 years. (We will be most likely be chucking in anywhere between 2.5 – 3.5k in extra repayments a month.

Stating the journey is probably the hardest part so good luck to you if you have decied this is the year to take the plunge. Just remember at the moment the increased First Home Owners Grant is only until the 30th June 2009 at this stage when it will be reviewed so might be better to look at the first half of the year when it comes to going to Contract.

With regards to repaying the debt i personally would not adopt such a strategy. Paying the loan off is finite and whilst with many loans they have a redraw facility the interest 2nd time round will not be deductible.

Take the loan as interest only loan linked to a 100% offset account (I would even take a 95% LVR from day one and deposit your  First Home Buyers Grant into the offset A/c) and put as much money in the offset account. If you are able to be discliplined then make that your prime account and have your salary etc deposited into this account.

The offset will preserve the tax deductability of the interest as well as giving you immediate access to your savings.

my questions are:

1. when it is rented out, are the payments tax deductible? ( i am guessing the principal part of the monthly payment is not tax deductible)

The interest is deductible from the day the property is available for rent even though it may not be actually rented. The principal is not deductible.

2. In order for me to get the FHOG, i have to live in the house for at least 6 months for the first 12 months. Can i live in the house for the first 6 months, rent it out, and everything afterwards still be considered tax deductible? 

Yes 6 months within the first 12 months after settlement wil satify the FHOG conditions. Once the property is available for rent then interest, depreciation and buulding write off if available will all be deductible.

3. what are your thoughts on this strategy??

My reason for doing this is because i currently live rent free, i am able to quickly repay my home. Would it just be better to keep the house as an IP only, and focus on paying it off?

As indicated there are better strategies out there with the same savings effect in order to reach your eventual growth goals.

Your mortgage broker as long as he has experience in the investment property market should be able to map out a suitable path for you to enable you to keep moving forward.

The key to any strategy is FLEXIBILITY.