IO vs P+I vs pay it off asap dilemma

[alpina]

we have this property that we purchased for $369k in dec 99. a similar one in the complex recently sold for $440k. Initially, we were getting $470pw but with the softening rental market we are now getting $420pw.

the property was finance with 2 loans:
1. $295.2k IO @ variable rate
2. $73.8k IO @ 6% fixed

we have since made lump sum payments on both loans:
1. $25.2k leaving balance of $270k - current repayments about $1.4kpm
2. $28.8k leaving balance of $45k - current repayments $225pm

We have for some time been looking at making another lump sum payment on loan 1 of $70k and also accelerating our payment on loan 1 to about $5k per month - hopefully getting rid of the loan in no time.

The thinking being that we have money in the bank getting less than 5% per annum, half of which goes to tax. Were thinking that if we put the money in the loan, we can always redraw off it when a good investment opportunity comes along or even revalue the property and borrow against the increased equity.

is this a good idea or not?

b&j

 

[Rolf Latham]

Hiya

Cant hurt to park your money based on those numbers. EXCEPT

1. if you then use the redraw for personal pusposes, then no tax deduction, better to use an offset acct anyway in many cases.

2. Be aware that many I/O loans do not have a redraw facaility available during the I/O period.

Do you have a home loan ?

Ta

Rolf

 

[geoffw]

Ben and Julie,

The first question I would ask, is "Have you paid off your own house- your so called "principal place of residence" (PPOR)?

If not, then definitely, it is not worth while paying off yourIP. Interest on your PPOR is not deductible, interest on your Investemnt Property is deductible. So if you're paying off your investment property while you own money on your house, then you're paying too much tax. Pay 100% off your PPOR beore even thinking about paying one cent off your IP.

It looks as if your loan for the IP was close to 100%. That would suggest that you have good equity in your PPOR. Perhaps you have it paid off 100% even? Fantastic if you have.

But, from another thread, you want to buy another property. I'd encourage you to do that- it's just that the property you suggested sounded not to be the best.

Peter Spann (a seminar presenter and property investor mentioned in a previous thread) suggested that there's two common mistakes in todays environment:

.Under gearing (Having a lot of equity that you don't use to borrow more)
.Over gearing. 95% loans (against total property you own) is too dangerous in today's environment. He suggests borrowing to about 80% of total equity.

I hope that's an accurate summation- and helpful to you

 

[bundy1964]

Originally posted by alpina
We have for some time been looking at making another lump sum payment on loan 1 of $70k and also accelerating our payment on loan 1 to about $5k per month - hopefully getting rid of the loan in no time.

The thinking being that we have money in the bank getting less than 5% per annum, half of which goes to tax. Were thinking that if we put the money in the loan, we can always redraw off it when a good investment opportunity comes along or even revalue the property and borrow against the increased equity.

is this a good idea or not?

b&j

I would tend to put the money in an offset account if it is available and put the extra 3.6 k a month in there as well.

I think a 100% offset account would be best because -

There is also another benefit to 100 per cent offset accounts that you may not realise. Unlike a savings account that earns interest which you must declare to the taxation office and pay tax on, the interest that accumulates in an offset account doesn’t actually ‘appear’. It simply reduces the amount outstanding on the loan. The end result is that you don’t pay tax on the interest that is generated from the offset account.

and you can withdraw at ant time without some of the fees that are charged on redraws from loans.

You also avoid the is it for investment or personal redraws which will affect how much interest you can claim as a deduction.

You seem to be folling the Anita Bell method of investing instead of the i/o loans only with a range of properties.

All depends on your goals and comfort level if you are doing the right thing

 

[alpina]

our interest only loan allows us to redraw.

Something that im not sure about though is if we redraw the 100k, can we then claim the interest on the full loan again giving that these were additional payments or not?

as for or ppor, we currently live in one of ben's parents properties -works out well as its rent free.

the investment property that i am talking about here is a standalone and not secured with any other property - good thing im guessing?

at some pt we will get our our place, perhaps when we get married next year. but that is something we will look at when we get closer to the date.

biggest thing that bugs us here is that the money in the bank is doing next to nothing for us - add our disposable income and we can put this loan to sleep in no time. of course i never even thought of doing this till i read another one of those property investment books

julie
(flying solo this time)

 

[Rolf Latham]

Hiya

Given that you will buy your own place soon, adn probably use the redraw as a deposit I would STOP paying extra right now. Those redrawn funds will not be deductible if used for PPOR payment

I would set up an offset acct and redraw your advance payments right now, well tommorow will do. The offset does the same as putting the money into the loan, but also preserves the tax deductability.

The intent today is to buy another investment property, so you should be ok from that point of view.

Ta

Rolf

 

[Kevmeister]

Agree with Rolf.

1. Establish offset account.

2. Put all personal monies in it.

3. Redraw back from the I/O loans, which are tax deductible, and put that in the offset account also.

Same interest savings on the redrawn amount; good rate of return on the personal monies; no nasty tax surprises likely.

Kevin.

 

[alpina]

what nasty tax surprises are we talking about here? less interest to claim on the IP loan?

julie

 

[bundy1964]

Originally posted by alpina
what nasty tax surprises are we talking about here? less interest to claim on the IP loan?

julie

Hi Julie
Once you pull money out of your IP loan to buy your PPOR the interest on that draw down amount is not a tax deduction.

That is the nasty surprise I think.

I think dale is the person to ask about how to recover your equity without losing your deductions.......maybe a short term buy in the stockmarket would cover you for drawing down for investment purposes? Not sure how long you would need to hold them for to keep your IP interest deduction? Steves cashbonds may be another way out to keep your deductions.

bundy

 

[alpina]

thanks bundy,

but i wasnt thinking of drawing down the money but rather using the equity to borrow 100% for the new ip.

probably missing something here but sure i will get wiser with time

julie

 

[bundy1964]

No nasty surprises when you draw down for investment purposes.

bundy