Can someone please clarify this?

C

Chloe

I just bought a property with a mortgage of $270,000.

I was chatting to my broker on the phone and I asked him what he thinks would be the best thing I can do to prepare for when I buy an IP (in approx 2 years) besides my own research of course.

I told him that my partner thinks I should only pay the minimum on the current mortgage and build savings but letting it sit in a redraw account.

The broker says to try and pay off as much as I can so I can borrow to buy an IP when the time comes. This current house could become the investment property when I upgrade.

So now I'm totally confused!

It makes senses to me to pay as much as I can.

Any thoughts?
 
Chloe said:
The broker says to try and pay off as much as I can so I can borrow to buy an IP when the time comes. This current house could become the investment property when I upgrade.
Click to expand...

If you do this, your capital is "trapped" (from a tax point of view) in your first propoerty - i.e. if you draw down and use the money for buying your nxt ppor, and turn this into an IP, you can't claim your interest costs against tax.
(you can if it is in an offset account - the effect is the same - it is just as if you were paying off the mortgage)

The Y-man
 
What you are asking is a question which can be answered from multiple angles.

It may be a good idea to pay down a loan from a lender's point of view. But maybe not a good idea from a tax point of view, especially if the property will become an investment later.
 
Hard to say.

If your serviceability is tight, then perhaps you can carry the amount of principal, and a redn is required

AS Y man says usually an IO loan with 100 % offset is best

ta
rolf
 
Broker says to pay as much as i can because as it's my ppor, i will have no tax benefits.

He says when it's time buy an IP or turn my own place into an IP I'll just borrow the max that I can depending on my circumstances and income at the time. He sees it as a good thing to owe less on the mortgage.

Why would having the extra money sitting in an offset account be more beneficial than putting extra $$ into the mortgage?

Sorry if this sounds stupid but I'm just trying to get my head around it!
 
Chloe said:
Broker says to pay as much as i can because as it's my ppor, i will have no tax benefits.

He says when it's time buy an IP or turn my own place into an IP I'll just borrow the max that I can depending on my circumstances and income at the time. He sees it as a good thing to owe less on the mortgage.

Why would having the extra money sitting in an offset account be more beneficial than putting extra $$ into the mortgage?

Sorry if this sounds stupid but I'm just trying to get my head around it!
Click to expand...

Hi Chloe

Time to get tax advice from a tax adviser and mortgage / structure advice from a broker........... your current person isnt doing you any favours.

Lets say you have a 100 k loan for the current ppor

You pay it down to zero, and now rent the place out

You buy a new ppor worth 200 k, but you need to borrow 200 k, coz you have used all your cash to pay for the old PPOR ( now an IP)

Bad news 1.
There is no interest attributable to the IP..............so there is no interest dedn

Bad news 2.
All ofthe 200k new PPOR debt is NOT deductible, because the purpose is for non income use.

Had you had the 100 k in offset instead of redraw, you take the 100 k cash, and the old PPOR now IP loan is still at 100 k, and the new PPOR debt is only at 100.

In many cases, stuffing this can cost 10s to100s of thousands...........

ta
rolf
 
Thanks guys,

Seems like I've done things back to front, buying a ppor that will be an IP.
So as long as I have my loan structured well this is not property suicide?
 
Chloe said:
Why would having the extra money sitting in an offset account be more beneficial than putting extra $$ into the mortgage?

Sorry if this sounds stupid but I'm just trying to get my head around it!
Click to expand...

Don't worry - confuses many.

The EFFECT should be the same (if you have what is called a 100% offset product).



Scenario A:

Let's take your $270k loan.

Every month you pay interest on $270k right?

Now let's say you get $10k (super bonus at work or something) next month.

You put that extra in the mortgage.

Next month you pay interest on $260k ($270-$10k)

Hope so far ok right?


Scenario B:

Now with a 100% offset...... this is how it works .... (hold tight!)

You have have $270k loan with a 100% offset account - all this is, is a separate account (same bank, just differetn account # etc). So it is like having 2 accounts.

You pay interst on the $270k as the previous scenario.

You get $10k from somewhere as per the previous scenario.

Instead of paying the $10k into the mortgage, you put it in your offset account (that mysterious 2nd account).

Now nerxt month, when the bank calculates your interest, they calculate it on the difference between the mortgage and the offset account
i.e. $270k - $10k = $260k

Same as the first scenario from your perspective right?


So why have it? Well here's where it gets interesting.....


Scenario A:

Suppose 5 years down the track, you have almost PAID OFF your home (well done! You worked hard :D).

So you owe let's say only $70k on it (you paid $200k extra into the loan)

Now you want to turn your first home into an IP and buy a new PPOR.

You redraw $200k from the loan to fund your new home. Let's say your new home needs a loan of $500k (ok, it was nice...)

i.e. the loan on your first home (now IP) is again $270k.

Outcome:

- you have $200k towards your new home, and only need an additonal loan of $300k

- you pay interest on the $270k you owe on the old home (now IP) BUT you can only claim tax deduction on the interest charged on $70k of the loan. You CANNOT claim the interest costs on the $200k portion you drew down to buy your new home (bugger! :()



Scenario B:

Again, suppose 5 years down the track, you have $200K as per scenario A, but you have the $200k in the offset account.

You only pay interest on $70k (as per scenario A), because the bank calculates the interest AS IF the money was in the mortgage account.

Now you want to turn your first home into an IP and buy a new PPOR.

And again, let's say your new home needs a loan of $500k

You go to your bank.

You withdraw (not "redraw"!) $200k from your offset account (just as you would any other svaings/transaction account).

Outcome:

- you have $200k towards your new home, and only need an additonal loan of $300k

- you pay interest on the $270k you owe on the old home (now IP) AND you can claim tax deduction on the interest charged on ALL $270k of the loan. (good huh?)




So summarising, from your point of view, it makes no major difference whether you pay off the loan or have an offset account.

BUT form the TAX office's point of view, it makes a BIG difference.

Hope this makes sense.....

The Y-man
 
Thanks Y man, much clearer now:)

So, it's worth paying the yearly fee to have the offset account then.
So if I'm just adding a few extra $'s $50 here, $500 there it's still ok?

At the moment I don't anticipate putting thousands in there as I want to settle in first and wait to see if there are any surprises on the building inspection that I need to attend to.
 
What if I have an offset account but my mortgage is P&I?

Can I change it to IO when I want to rent it out and buy something else?

It's all beginning to make sense now! Sort of.
 
Chloe said:
What if I have an offset account but my mortgage is P&I?

Can I change it to IO when I want to rent it out and buy something else?

It's all beginning to make sense now! Sort of.
Click to expand...

If you have a PI loan with offset then you will be paying down the loan faster than normal. This is generally a good thing, but if the property will become an investment this will mean you are tying up more of your money in the investment and will have less cash available for the new main residence.

This means low tax deductions and higher non deductible interest.

eg. if you were to pay $10,000 off the current loan and then buy a new house to live in. If interest rates were 6% this would mean $600 pa less in tax deductions each year and $600 more in non deductible interest.

Think of the compounding effect over say 10 years too.
 
Thanks Terry,

I have one more question for anyone who wants to answer!

If this ppor is not going to be an IP for about 4 years then would you still say a loan with an offset is better than a redraw? The loan will be with CBA so it would be the MAV package.

Thanks
 
Chloe said:
Thanks Terry,

I have one more question for anyone who wants to answer!

If this ppor is not going to be an IP for about 4 years then would you still say a loan with an offset is better than a redraw? The loan will be with CBA so it would be the MAV package.

Thanks
Click to expand...

When you redraw from a loan you are beginning a new loan. The interest on this new loan (ie the redrawn amount) would only be deductible if the money is used for investment purposes.

It seems like you are thinking to redraw and use for the purchase of a new main residence.

Imagine you had paid $100,000 in advance. If you withdrew this you would be paying an extra $6,000 pa in interest. But this wouldn't be deductible.

But if you had used a 100% offset then you would not be borrowing this money but just taking it from a savings account. But in the meantime you would be saving approx $6,000 pa in interest on your loan - the same as if you had paid off 100k.

So this method would result in an extra tax deduction of $6k per year - which is a huge amount, especially when compounded over 30 years.
 
You must log in or register to reply here.

Similar threads

T
New Investor
Replies
8
Views
2K
TFE
T
M
Buy to live in now or rent it out. Advice please
Replies
8
Views
2K
Maidenvain
M
R
Would you buy out your parents home in this scenario?
2
Replies
38
Views
5K
albanga
albanga
T
Subdivision for x2 existing units
Replies
0
Views
657
Tilda
T
S
Newbie Here - looking for Advice
Replies
10
Views
3K
smokyjoe
S
Back
Top