Best loan/account structure for my IP

[Propertynewby]

Hi,

Just wondering whether i should be putting all my savings in my 100% offset account or into another completley seperate savings account?

MyIP figures are as follows:

Purchase price: $401k
Loan amount $420k
Monthly AFTER tax deficit (taking into account ALL costs) = $168.00

Bascially the property is almost positively geared so i dont see the need in putting money in my offset in order to reduce interest repayments?

I have about $20k in savings and not sure weather to put it in my offset or leave it in my ING account earning interest?

thanks in advance

 

[Jamie M]

Hiya

How is the loan amount higher than the purchase price? Sounds like the loan may be crossed up with another property.

Do you have a PPOR loan? If so - savings in that offset would be best.

Cheers

Jamie

 

[Redom]

Hi,

Just wondering whether i should be putting all my savings in my 100% offset account or into another completley seperate savings account?

MyIP figures are as follows:

Purchase price: $401k
Loan amount $420k
Monthly AFTER tax deficit (taking into account ALL costs) = $168.00

Bascially the property is almost positively geared so i dont see the need in putting money in my offset in order to reduce interest repayments?

I have about $20k in savings and not sure weather to put it in my offset or leave it in my ING account earning interest?

thanks in advance

You're likely to be earning ~4% in your ING account. Interest income is taxable.

You can earn whatever the interest rate you pay by putting it in your offset.

So it'll be slightly better to move funds there.

Although, as Jamie said, if your have a PPOR offset, best to place your funds there (because interest you pay is non deductible).

Cheers,
Redom

 

[Peter_Tersteeg]

Firstly it does look like you're cross collateralising with another property (based on the loan amount). This is going to cause you massive problems later if you intend to build a larger portfolio.

If you pick the wrong lender with this structure, you've got no flexibility to move to a different lender. Whilst this may not be a problem now, at some point your existing lender may refuse to lend more and you'd be forced to go elsewhere.

If you've got other non deductible debt (such as your own home), make sure there's an offset against that. If this is not the case, then an offset account is more cost effective than any savings account regardless of how positive cash flow the IP is.

 

[Redom]

Firstly it does look like you're cross collateralising with another property (based on the loan amount). This is going to cause you massive problems later if you intend to build a larger portfolio.

Second this. I'd look into cleaning this up before making your next move.

Cheers,
Redom

 

[Terry_w]

Its really irelevant whether the property is positive or negative geared as the tax effect is the same.

 

[Rolf Latham]

xcoll , unless you are using a family guarantee or the like...........



the below link applies and LOTS more

http://somersoft.com/forums/showpost.php?p=120656&postcount=6

ta
rolf

 

[Propertynewby]

Thanks for the reply guys

I borrowed 110% because my parents guaunteed $100k equity in their property. This is my only property & i have no PPOR (Im only 23 and stil live at home with rents).

I will be removing the guaruntee once there is >$100k equity in the property. Does this affect tax/deductions? It seems as though it shouldnt as the mortgage is in my name only (+ 3rd party gunaruntee)?

My broker has suggested using the offset account

Thanks

 

[Redom]

Not a tax expert, so the accountants will follow, but i think you're understanding is correct:

Current tax effect: You claim all interest deductions for the property. Your parents dont claim any tax consequence for the gaurantee which is viewed as 'contingent liability' on their personal balance sheet.

When you move the gaurantee, same impact (you claim all deductions).

Cheers,
Redom

 

[Jamie M]

I will be removing the guaruntee once there is >$100k equity in the property. Does this affect tax/deductions? It seems as though it shouldnt as the mortgage is in my name only (+ 3rd party gunaruntee)?

No - it shouldn't.

Cheers

Jamie

 

[Greg Reid]

I agree with Peter, it would be rare that having funds in a savings account gives a better after tax result than using an offset.

If you get to a stage where funds in offset = loan, then use a savings account or similar for any $ above the loan amount, otherwise use the offset.

Removing the guarantee will not affect your own tax deductibility.

 

[kmrr]

Don't mean to hijack but how does an offset account differ to just paying down debt?

 

[Terry_w]

Don't mean to hijack but how does an offset account differ to just paying down debt?

Tax.

Paying down a loan means if you later need the cash and redraw it for personal expenses then the interest will not be deductible.

But if you kept the cash in the offset the loan hasn't been paid down and there are no new borrowings when the cash in the offset is used so even if the offset is used to buy private items the interest on the loan will still be deductible.

 

[perthguy]

I agree with Peter, it would be rare that having funds in a savings account gives a better after tax result than using an offset.

This makes my head hurt. I only have deductible interest and it was all on a fixed rate until recently. At the same time, I am saving up for a MR deposit, so those funds went into a high interest savings account at 4%. My loan is not 4.63%. So I pay interest on the loan at 4.63% (deductible) and earn interest on my savings at 4%, and I pay tax on that. I have no idea what the tax implications are. I suppose I should work it out really, although I can't imagine the difference would be too much?

 

[Asheam]

Difference would be 0.63% x ( 1 - marginal tax rate) x cash available for savings or offset per year. E.g if ur tax rate was 30 % and u had 100k to place somewhere the difference would be approx $440 over a year.

 

[kmrr]

thx for the response terry!

 

[Peter_Tersteeg]

Don't mean to hijack but how does an offset account differ to just paying down debt?

In essence you keep money you've saved (which is taxable) separate from money you've borrowed (which is not taxable).

If you mix the two, such as in a redraw account, it makes it difficult to determine how that money and the loan should be treated in the future. This can lead to further problems, so it's just easier to keep the two separate.