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From: Mike .
How Mortgage Reduction Schemes Work
From: John (Brisbane)
Date: 31 Jan 2001
Time: 12:15:50
There are many organisations that are charging upto $2000 to set up an advanced mortgage reduction system for your invesment properties. Indeed, I have come across one that will even arrange the purchase of a suitable property for you!
Anyway, I'm a 'do it yourselfer'. It's forums like this one where you can share so called 'secrets' for nothing. Information should be free to all who desire it! I have researched these Mortgage Reduction Schemes and surmise that the best of them works a little like this:
First you seek to refinance your home on a line of credit loan which is split into 2 separate loans for reporting purposes. One has a lower limit, and will be used for your personal debt (i.e. home mortgage) and personal expenses. The second split has a much higher limit for tax deductible expenses such as IP rates, IP insurance, providing deposits on IPs, some shares maybe, etc.
You then need to change your personal spending habits so that you get into the habit of purchasing most personal items on your credit card. (but don’t get carried away) You do this so that you leave your salary sitting in your loan account untouched for 27-days.
You then obtain an interest only loan for the IP (including stamp duty & conveyancing), with the deposit coming from the ‘expenses LOC.’ Only deductible investment expenses are drawn down from the ‘expenses LOC’, and they are not to be repaid for as long as the credit limit will allow.
Both salary and rental income are deposited directly into the ‘personal LOC’ as regularly as possible. An automatic end-of-month transfer then withdraws from this account the interest payment required on the ‘expenses LOC’, ‘IP I/O loan’, and the credit card used for living expenditure.
The net effect is that the ‘IP I/O loan’ never gets paid off. The ‘expenses LOC’ actually gets larger. The ‘personal LOC’ reduces very quickly, firstly as it has received additional payments equal to the value of the expenses added to the ‘expenses LOC’. Secondly, as the daily balance is momentarily deflated until the end of the month when interest payments are due, you are paying non-deductible interest on a lower outstanding balance.
The taxation benefits are that you can now claim a deduction for the interest paid on the investment expenses as well as the initial deposit. When you are getting near to your credit limit on your ‘expenses LOC’ you must go for a higher re-valuation on your home to enable the limit to be pushed out further yet. If you are able to get a higher re-valuation on the investment property then redraw this equity and transfer it to the ‘expenses LOC’. This system also avoids cross-collateralisation of loans, therefore minimising your risk.
NOW, all my learned friends, have I missed anything? A some minor details a little astray? Can this system be further refined?
Come on everyone, let's give this one a good working over.
Thanxs to all.
How Mortgage Reduction Schemes Work
From: John (Brisbane)
Date: 31 Jan 2001
Time: 12:15:50
There are many organisations that are charging upto $2000 to set up an advanced mortgage reduction system for your invesment properties. Indeed, I have come across one that will even arrange the purchase of a suitable property for you!
Anyway, I'm a 'do it yourselfer'. It's forums like this one where you can share so called 'secrets' for nothing. Information should be free to all who desire it! I have researched these Mortgage Reduction Schemes and surmise that the best of them works a little like this:
First you seek to refinance your home on a line of credit loan which is split into 2 separate loans for reporting purposes. One has a lower limit, and will be used for your personal debt (i.e. home mortgage) and personal expenses. The second split has a much higher limit for tax deductible expenses such as IP rates, IP insurance, providing deposits on IPs, some shares maybe, etc.
You then need to change your personal spending habits so that you get into the habit of purchasing most personal items on your credit card. (but don’t get carried away) You do this so that you leave your salary sitting in your loan account untouched for 27-days.
You then obtain an interest only loan for the IP (including stamp duty & conveyancing), with the deposit coming from the ‘expenses LOC.’ Only deductible investment expenses are drawn down from the ‘expenses LOC’, and they are not to be repaid for as long as the credit limit will allow.
Both salary and rental income are deposited directly into the ‘personal LOC’ as regularly as possible. An automatic end-of-month transfer then withdraws from this account the interest payment required on the ‘expenses LOC’, ‘IP I/O loan’, and the credit card used for living expenditure.
The net effect is that the ‘IP I/O loan’ never gets paid off. The ‘expenses LOC’ actually gets larger. The ‘personal LOC’ reduces very quickly, firstly as it has received additional payments equal to the value of the expenses added to the ‘expenses LOC’. Secondly, as the daily balance is momentarily deflated until the end of the month when interest payments are due, you are paying non-deductible interest on a lower outstanding balance.
The taxation benefits are that you can now claim a deduction for the interest paid on the investment expenses as well as the initial deposit. When you are getting near to your credit limit on your ‘expenses LOC’ you must go for a higher re-valuation on your home to enable the limit to be pushed out further yet. If you are able to get a higher re-valuation on the investment property then redraw this equity and transfer it to the ‘expenses LOC’. This system also avoids cross-collateralisation of loans, therefore minimising your risk.
NOW, all my learned friends, have I missed anything? A some minor details a little astray? Can this system be further refined?
Come on everyone, let's give this one a good working over.
Thanxs to all.
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