No non-deductible loan, where to place savings?

[J_aco]

Hi all,

For someone who has NO non-deductible loan:

Question 1: can someone please tell me which of the following point is correct or it depends on individual circumstances?

* offset for IP loan is futile
* offset for IP loan - interest saved is still greater than potential tax benefit

I've run the following calculations:

Assumptions, simplified for the sake:
Salary: $80k pa
Tax rate: 34%
IP loan with offset: $300k @5%

Scenario 1: if spare cash of $60k in offset

Loan interest payable: $300k-60k=$240k @5%=$12000.
Tax payable: $(80000-12000) x 34% = $23120.

Total 'outgoing' for the year: $23120+12000=35120. (And annual fee of $3XX of having the offset acct)

Scenario 2: if spare cash of $60k in TD at 4%

TD interest: $60k @ 4% = $2400
Loan interest payable: $300k @ 5% = $15000
Tax payable: $(80000+2400-15000) x 34% = $22916

Total 'outgoing' for the year: $15000+22916-2400=35516.

Question 2: so then if it really makes minimal difference, where should one place the savings?

Sorry if they are silly questions. Thanks in advance!

 

[redwing]

Wow, you can get 4% for a TD, that's pretty good

 

[Simon]

Put it in the lowest tax payers name.

Do you have close family with an offset on their PPOR. Maybe you can work something there.

 

[Hodge]

Where can I get 4% for a term deposit? That's pretty impressive.

 

[J_aco]

Hi guys,

1. Single. Noone else to put money to.

2. Sorry for confusion - I just put that figure there for calculation-simplicity sake (ING is 3.6% 1 year btw)

 

[Ace in the Hole]

If those are the only 2 options, the offset gives the best results.
You can also access your money instantly for other investments and opportunities.
Otherwise, look for higher returns and weight up the risks and liquidity based on your future plans.

 

[yee3890]

offset is better off, i.e 5% saving in offset better than 4% or 3.6% in TD

 

[Terry_w]

If investing in the same name then it would always be better to go for the higher return. Whether you save $1 in interest or make $1 more income it will work at the same tax wise.

 

[Paul@PFI]

An offset account for a IP loan isn't futile.

Its not the best thing. But if you have zero non-deductible debt then you need to rethink your approach to one of debt reduction as a form of saving. Debt reduction = equity. Sure you cant milk a tax benefit but you can enhance ownership by banking savings that reduce interest so that a compound effect to save cash outflows occurs. This builds equity through compounding.

This is what I refer to as the Italian solution. Older Italians hate debt. They worked hard and did a stack of overtime and plowed their wages into smashing their debt/. They hated debt. They built equity rapidly through growth and accelerating their debt repayments.

The modern day focus on IO loans for property has to be rethought if you have surplus cashflow. Use the offset to build a cash pool. Its either equity of a deposit for the next ....

 

[J_aco]

Thx all for the responses!

In regards to 'use equity for IP/shares and use tax paid cash for private stuff', which I read in some other thread/post (sorry if I've taken it out of context, or it's not applicable in my situation)

For someone starting out I'll just have to use cash don't I?

For e.g. if I want to renovate to add value and manufacture equity, I'll have to use cash?

Unless I wait a while (maybe a year?) for IP to increase in value and I get a LOC to fund the renovation costs?

 

[Terry_w]

Thx all for the responses!

In regards to 'use equity for IP/shares and use tax paid cash for private stuff', which I read in some other thread/post (sorry if I've taken it out of context, or it's not applicable in my situation)

For someone starting out I'll just have to use cash don't I?

For e.g. if I want to renovate to add value and manufacture equity, I'll have to use cash?

Unless I wait a while (maybe a year?) for IP to increase in value and I get a LOC to fund the renovation costs?

No you don't have to use cash.

In another post didn't you say you have equity?

Even if no equity there are related party loans you could use to mazimise deductions.

 

[J_aco]

Hi Terry,

Is this considered equity:

Paid $30k cash deposit for IP. Purchase price $330k (and assuming that's current market value). Loan amount $300k.
Is the $30k an 'equity' already?
I was always thinking that the house value has to increase for me to have equity?

On that note, if I already have '$30k equity', assuming the above is correct, I can get a LOC of $30k to fund reno cost?

What are the 'related party loans'?

Thx in advance!

 

[Terry_w]

Hi Terry,

Is this considered equity:

Paid $30k cash deposit for IP. Purchase price $330k (and assuming that's current market value). Loan amount $300k.
Is the $30k an 'equity' already?
I was always thinking that the house value has to increase for me to have equity?

On that note, if I already have '$30k equity', assuming the above is correct, I can get a LOC of $30k to fund reno cost?

What are the 'related party loans'?

Thx in advance!

Yes it is equity, but unless your property has grown in value you would unlikely be able to borrow more money.

Related party loans are loans between related parties - spouse, family, trusts.