Interest only with an offset against PPOR

Discussion in 'Property Finance' started by Jamie M, 12th Jan, 2015.

  1. aussieB

    aussieB Member

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    Thanks for the article Jamie.

    What would be a better frequency of payment for a) Fixed rate loans and b) Variable loans ? Weekly, fortnightly or monthly? (assuming any option is doable)

    I will be on a fixed rate loan of an IO loan and want to be able to save every penny I can. I am paid weekly and can put that money into the offset account. So interest accounted on a daily basis will bring the payments down. It seems to me that a monthly payment would be the most fruitful way forward in my case. Or did I get it wrong ?
     
  2. Jamie M

    Jamie M Mortgage Broker - Oz Wide

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    Hiya

    If the loans are IO then the repayments will generally be monthly.....if you could choose, it wouldn't make any difference anyway as interest is calculated daily.

    Cheers

    Jamie
     
  3. Corey Batt

    Corey Batt Finance Broker

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    Also, who are you looking to put the lending with? Most lenders won't allow you to attach an offset account to a fixed rate, which may unhinge a part of your plan. There are some lenders of course who will allow it, and is generally one of their primary product niches.
     
  4. aussieB

    aussieB Member

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    Thank you

    Hey Corey, I am borrowing from CUA. Their 3 year fixed rate loan comes with an offset account, which is one of the main reasons I am going with them.
     
  5. WattleIdo

    WattleIdo Member

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    Thanks for this Jamie - you have a way of spelling things out clearly.

    Wondering whether there would be any disadvantage to this:
    Same strategy - i.e. buy ppor, live-in, renovate (optional), use redraw to park extra funds instead of off-set, find new property to move into, withdraw funds from redraw (deposit or whatever), rent out original ppor which is now ip.

    I'm thinking the only drawback would be the flexibility or lack thereof of the lending institution? I.e. once you redraw the extra funds it would be best to have an IO loan but there would be fees associated with the change?

    I ask because changing loans is no drama with my current lending institution (TMBank) - maybe $200 atm.

    Does redraw go with P&I and offset go with IO at all times?
     
  6. Jamie M

    Jamie M Mortgage Broker - Oz Wide

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    Hiya

    Glad you found the info useful :)

    The issue with "redrawing" money is that the purpose determines deductibility.

    So if you redraw the money from your loan - what are you going to use those funds for? I assume for your next PPOR - therefore the purpose isn't investment related.

    For that reason it's best to put the money in an offset rather then into paying down the loan principal.

    Hope that helps.

    Cheers

    Jamie
     
  7. WattleIdo

    WattleIdo Member

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    Mmmm. My understanding is that you can redraw your funds while you still live there and the loan reverts to what it would have been without the extra funds. The loan then becomes completely tax deductible once you put a tenant in your property. You can still do whatever you like with the money without having tax complications.


    Mmm. Paying down the principal increases both serviceability/cashflow and equity at the same time. My thoughts at the moment are that this is preferable for medium or low income earners because it gives more security/sanf. Not suited to the real go-getters and young high risk approach, of course.

    Anyway, thanks for spelling it out because it makes it easier for me to question the benefits of this method and to customise it to suit myself.
     
  8. Corey Batt

    Corey Batt Finance Broker

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    If you redraw funds against a PPOR loan for non investment use/PPOR renovations, then rent the PPOR out in the future the redrawn portion will not be tax deductible, as the purpose of those redrawn funds is not aligned to an investment. This means you will have a contaminated loan and any payments made onto the loan would have to be apportioned.

    The easiest way to neaten up one of these scenarios is to then split the deductible and non deductible portions, so payments are not needed to be apportioned for tax purposes.
     
    WattleIdo likes this.
  9. WattleIdo

    WattleIdo Member

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    Wow I didn't realise this was the case with a PPOR.
    An offset would be easier then.
     
  10. Jamie M

    Jamie M Mortgage Broker - Oz Wide

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    Sure is.

    Redrawing money from a PPOR loan that's going to become an IP causes a big mess.

    Placing surplus funds into the offset is the answer.

    Cheers

    Jamie
     
  11. lawmich

    lawmich Member

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    where is the 'like' button??? :)
     
  12. Ralph1

    Ralph1 Member

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    Sure is.

    Redrawing money from a PPOR loan that's going to become an IP causes a big mess.

    Placing surplus funds into the offset is the answer.

    Cheers

    Jamie


    Hi Jamie, love your posts.
    We are looking at doing renos on our PPOR and use equity to fund it and may rent it out at a later date and purchase a new PPOR.

    If we Redraw money from our PPOR loan and place it in the offset now, does that work.

    Ralph
     
  13. C Stewart

    C Stewart Member

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    Just wondering from a borrowing power perspective, does going I/O still make sense?

    I'd prefer going P/I (forced savings) but don't want to limit borrowing power. Does all these new rules with assessments of debt treated differently change this?
     
  14. Corey Batt

    Corey Batt Finance Broker

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    The new changes actually make interest only a negative for the majority of lenders - as the serviceability is instead calculated on the remaining P&I period, ie, a 25 year loan instead of 30.

    There are some non regulated lenders which will still accept actual repayments for their calculations which IO will give benefit, but they aren't the mainstream lenders that people are used to working with.
     
  15. Jamie M

    Jamie M Mortgage Broker - Oz Wide

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    Agree with Corey - IO on a PPOR is likely to have a negative impact on future borrowing capacity with most lenders under the current lending environment.

    However - it shouldn't be a massive difference and if the PPOR is going to be converted into an IP at some point then I'd IO is still going to be the better option in my opinion.

    The trick is now trying to get lenders to allow IO against a PPOR!

    Cheers

    Jamie