Increasing Portfolio

[WebBoard]

From: Mike .


Spare Money: What to do with it
From: TW
Date: 6/10/00
Time: 11:53:28 AM

I currently have 2 investment properties and am renting the place I live in. We don't have enough income to borrow for our next property (wife currently not working), but I have plenty of money left over ($15,000 pa) which I am currently puting into the P&I loan of one property.

My Question is: whould it be better just to pay interest only and save the money for a deposit for the next place or should I keep paying off the loans as fast as possible (tax deductions will decrease)? Thanks

TW

 

[WebBoard]

Les

Reply: 1
From: Mike .


Re: Spare Money: What to do with it
From: Les
Date: 6/10/00
Time: 12:45:16 PM

G'day TW,

Sounds like you are "on your way" and congratulations!!! Before giving my opinion, let me repost a reply from earlier in the forum.

"One of my earlier answers (to another forum writer) documents the gains of IO vs P&I - probably the MAIN point being that it takes $200 earned (at 47% marginal Tax rate) to pay off $100 on your P&I loan - and the Equity "leap" when you do that? $100 !!! (whoopeee ;^) Instead, get the full $200 benefit by gaining Tax deductions, and DON'T water them down by paying off principal." Les (JS forum Oct 99)

So, in a word, I believe IO is the way to go. I would also suggest you look at a Redraw or Offset account - that way the money you save is STILL AVAILABLE to you in the future, as a deposit, while lowering the Interest payable at the moment. In that way, you don't need to refinance to get your money out again!! You simply write a cheque, or withdraw the saved money from the account, and IP#3 is yours!!

But (from other forum noters) be sure that the Redraw or Offset will offset the FULL 100% amount of your savings, with the FULL mortgage rate of Interest. By example, if your mortgage is $200k at 7%, and you save $20k in this account, then this SHOULD reduce your Interest Payable by $1400 per year - apparently NOT all lenders do this, so WATCH THEM when they set it up. Apparently, SOME lenders will give 0.75% (or whatever normal Savings accounts are giving...) on $20k - NOT good!!!

Regards, Les