debt reduction strategies..

[kelvinh]

Was watching JDL Strategies free DVD this weekend.. and they talk about debt reduction by..
having the rental income go into your PPOR home loan.. then when the IP loan repayment was required you then shift the monies across..

And the presenter recons it saves huge amount of time off repaying the PPOR home loan...

I just did a quick calc and it didnt seem to accelerate your repayment very quickly at all...

Has any one used this strategy and or have a spreadsheet that shows the difference...

 

[WillG]

Every little bit helps. Capitalizing expenses such as rates, insurance, body corp & property management will give you extra $$'s to reduce 'non deductible debt

 

[redwing]

Probably makes a difference as you acquire additional IP's; I'd presume you put wages and savings as well as rents into the PpoR Loan A/C or an offset or LOC and each Month have the rents go across to assist paying the IP Interest (meantime its sat in your PPoR A/C for the majority of the Month)?

 

[BayView]

Yep, the interest on most loans is calculated daily, but applied to your loan monthly.

So, the more often you can put money into the loan, even if it is the same amount as your monthly repayment, then in theory you will be charged less interest at the end of the month.

Baiscally though, if you can divide your monthly repayments by 4.3 (that's how many weeks there are in each month) and pay that amount each week PLUS even another $20 each repayment, you will shorten the loan by a substantial amount of time and interest.

Putting the rent into the PPoR will help as well of course, but on it's own probably not by a lot.

I just did a quick calc on a 25 year loan, $200k amount at 8% interest. The repayments were $1,543.63.

Then, I changed the repayments to weekly, and with an extra $20 per payment. The saving was 3 years and 7 months, and an interest saving of $45,443.09.

That's nearly an IP deposit for sacrificing the "Latte Factor" each week. Not bad.

 

[Twitch]

I think the more relavent saving is if you can, say, recycle $50k worth of debt per year turning it from non-deducable to deductable it will save, say, $50,000*8%*0.3 = $1,200p.a. Then another $1,200 the next year plus the $1,200 from the previous year, and on and on.

 

[gooram]

Kelvin,

Do some searching of the forum, there's heaps of threads on this topic.

Keywords: Debt recycling, Capitalising Interest, Interest on Interest

Cheers,
Gooram

 

[asdf]

You're simply converting non-deductible debt to deductible so rather than paying 8% interest, in effect you get it for 5.6% on the 30% tax bracket. The more the govt raises the thresholds, the less tax effective the strategies. Wonder how popular this rhetoric is to my MP - Stop reducing my taxes and bring back 48.5% tax rates over $50k!

 

[Able]

Yep, the interest on most loans is calculated daily, but applied to your loan monthly.

So, the more often you can put money into the loan, even if it is the same amount as your monthly repayment, then in theory you will be charged less interest at the end of the month.

Baiscally though, if you can divide your monthly repayments by 4.3 (that's how many weeks there are in each month) and pay that amount each week PLUS even another $20 each repayment, you will shorten the loan by a substantial amount of time and interest.

I think for some people there is a serious misconception regarding paying interest weekly versus monthly. In order to show a proper comparison we should only be interested in money which is sitting in a bank account and set aside for a loan payment. The sooner the loan payment is made, the less interest will be incurred.

If you are paid (or if money enters this account) weekly then it could be sitting doing nothing (assuming no interest is earnt) until the monthly loan payment every 4.3 weeks. In this case there would be a slight advantage in making weekly payments to the loan.

On the other hand i you are paid (or money enters your account monthly), then you are better off paying the loan monthly asap rather than 'stringing out' the dollar amount into weekly payment over the next 4.3 weeks. Paying weekling would simply mean that money would again be sitting doing nothing for up to 4.3 weeks.

However, an offset account means you do not have to worry about any of the above. As soon as pay (or other money) comes into the account, it offsets interest and this is the key factor. It would not matter whether your payments are weekly, monthly, or even what time of the month they are made.

Regards
Able

 

[kelvinh]

The JDL dvd was anti capitalising interest.. and even into reducing IP debt...
The way it was presented it was saying that putting the IP rent into your HL saves HUGE amounts of time off your PPOR HL...
From the quick calcs Ive done.. its all pretty minor gains.

Thanks for the info all...

 

[BayView]

The JDL dvd was anti capitalising interest.. and even into reducing IP debt...
The way it was presented it was saying that putting the IP rent into your HL saves HUGE amounts of time off your PPOR HL...
From the quick calcs Ive done.. its all pretty minor gains.

Thanks for the info all...

I tend to agree with not capitalising interest. To me, it's a bit of a "robbing Peter to pay Paul' scenario. You are paying down the non deductible interest, while allowing the deductible interest to accumulate. Over time, the cap growth is supposed to offset this, and there is also the tax deduction on the interest, but it is still increasing the debt, or, at best not decreasing the over-all debt.

I like to see people make their IP loans IO, and the PPoR loans P&I, and any spare cash and tax returns go straight onto the PPoR loan first.

As for paying down IP debt, I think that ALL debt should be decreased as soon as possible, starting with any no-deductible debt first, then continuing on with the deductible debt after that.

Less debt means better cashflow and increased equity. Both are good things. The biggest killer for businesses and Property Investors is lack of cashflow.