Offset account vs partial repayment- Newbie doubts

[rajorich25]

Hello Experts,

I am a newbie and following this forum since quite time.I am educating my self for buying a IP in coming days, have some questions though.
kindly correct me if any of my assumption/belief are wrong-

1) I wanted to take a loan as PPOR , stay there for 6 months then covert it to IP so that I don't need to pay GST if a decide to sell the property in next 6 years.

2) me and my wife earns 80K each per year and we are planning to buy a property worth 5-600K(with 20 % down payment), total tax benefit would be 27K per year , where as individually the tax payable to us ( before deducting home loan interest tax deductions ) comes around 20 K each. so we both would be able to save around 14k each.

3) the EMI will come to around 3-3.5K( 4.8-5 % interest rate) where as our earning is around 10 K per month.

4) I was planning to start partial pre-payment from very first month and try to finish the loan asap but i got to know about 100 % offset account and use of credit card to make it more effective.
Now I am confuse which option is more beneficial , 100 % offset account one or doing partial pre-payment .

5) i am buying much lower cost propery then my loan borrowing capacity due to fear if market collapse in coming years(as rumors are going on ), also i wanted to keep on person income safe in case market situation or our job scenarios changes.

6) As property selection criteria I am valuating median prices of cost and rent ratio( along with considering other charges- strata etc) and shortlisting top 5 suburbs in NSW , then keeping an eye on current sale and auction results.

As i said i am a newbie and just started learning the basics, any help would be greatly appreciated , kindly guide me in right direction.

Kindly advice .

Regards,
Rajorich

 

[Rolf Latham]

Hi Raj

IO with100 % offset usually provides for more options

You dont come across as needing the discipline that comes with a PI loan.

Remember too that most variable IO loans do allow paying the loan down as fast as you want ........... but for most, this isnt the best strategy.

ta
rolf

 

[rajorich25]

Hi Raj

IO with100 % offset usually provides for more options

You dont come across as needing the discipline that comes with a PI loan.

Remember too that most variable IO loans do allow paying the loan down as fast as you want ........... but for most, this isnt the best strategy.

ta
rolf

Thanks for the quick response Rolf ,

Can you provide little more detail of pros and cons please , I thought as a loan product , investment or owner property both are same and it doesn't create any difference from bank's perspective .

The Idea is to reduce the taxable income at the end of the day and yes keeping money for future property prospects is also good option and thats where confusion starts as i unable to actually calculate the difference in terms of money advantage.

Thanks again.

Regards,
Rajorich

 

[Terry_w]

What does EMI mean?

And why would there be GST if you sold in 5 years? Only new residential property would have GST on it and only at the first sale - if you are buying that is the first sale.

 

[The Y-man]

Thanks for the quick response Rolf ,

Can you provide little more detail of pros and cons please , I thought as a loan product , investment or owner property both are same and it doesn't create any difference from bank's perspective .

It doesn't make much difference to the bank - but huge difference for the Tax Office.

If you don't do offset to start with, you get problems like this person:
http://somersoft.com/forums/showthread.php?t=95797&highlight=offset

The Y-man

 

[rajorich25]

What does EMI mean?

And why would there be GST if you sold in 5 years? Only new residential property would have GST on it and only at the first sale - if you are buying that is the first sale.

Thanks for the response Terry,
EMI - easy monthly installement , the every month money payment which goes to bank.

So If i buy a new residential property and sell it later , i will not require to pay any GST ?, i thought stay there for first 6 months to qualify that property as PPOR and then move some where else and sell it later(within 6 years))to avoid GST while selling.

Thanks,
Rajorich

 

[rajorich25]

It doesn't make much difference to the bank - but huge difference for the Tax Office.

If you don't do offset to start with, you get problems like this person:
http://somersoft.com/forums/showthread.php?t=95797&highlight=offset

The Y-man

Thanks for the response Y-man,

Thats a good thread and it seems to use offset account strategy rather then partial Pre-payment.

But i think it make sense only if interest rates are not changing much , otherwise its better to pay off through re-payment fastly , does it sounds correct ?

Thanks,
Rajorich

 

[Terry_w]

Thanks for the response Terry,
EMI - easy monthly installement , the every month money payment which goes to bank.

So If i buy a new residential property and sell it later , i will not require to pay any GST ?, i thought stay there for first 6 months to qualify that property as PPOR and then move some where else and sell it later(within 6 years))to avoid GST while selling.

Thanks,
Rajorich

Check with your accountant, but once you buy it the property is no longer new. If you are constructing it may be different.

 

[Liberator]

Thanks for the response Terry,
EMI - easy monthly installement , the every month money payment which goes to bank.

So If i buy a new residential property and sell it later , i will not require to pay any GST ?, i thought stay there for first 6 months to qualify that property as PPOR and then move some where else and sell it later(within 6 years))to avoid GST while selling.

Thanks,
Rajorich

I wonder if you are meaning CGT instead of GST?

 

[The Y-man]

But i think it make sense only if interest rates are not changing much , otherwise its better to pay off through re-payment fastly , does it sounds correct ?

Thanks,
Rajorich

The EFFECT to you financially of offset and prepayment is about the same (offset makes it look like you have paid part of your loan off - so interent is charged as if you had paid off).

IF you even partially REPAY your loan, essentially you can NEVER get your money back out unless you sell the property (if you want to claim tax deduction in future).
It LOCKS UP your capital.

The Y-man

 

[rajorich25]

I wonder if you are meaning CGT instead of GST?

I am so sorry guys - you are correct it is CGT not GST :-eek:

 

[Terry_w]

CGT doesn't normally apply to the main residence.

 

[rajorich25]

Check with your accountant, but once you buy it the property is no longer new. If you are constructing it may be different.

I am so sorry guys - you are correct it is CGT not GST :-(