Pay down PPOR loan or Save for IP?

[noodles]

Propertunity really gave a great explanation on negative gearing in a recent post. I read a book by Margaret Lomas, but I became utterly confused with the maths. So great job Propertunity

We've just brought our 1st PPOR. Our strategy is to pay off the interest and the principle on our loan so that the loan eventually gets to a manageable size. After 5 years we would like to rent it out and use neg gearing.

My question is should I put all my savings into paying down my PPOR first? Or should I do both, pay off the IO loan on the PPOR and at the same time save for a 20% deposit on the future IP? This second option might be more challenging

 

[JamesGG]

If you've got an offset account, try using that. Best of both worlds and gives better options moving forward

 

[HandyAndy888]

Propertunity really gave a great explanation on negative gearing in a recent post. I read a book by Margaret Lomas, but I became utterly confused with the maths. So great job Propertunity

We've just brought our 1st PPOR. Our strategy is to pay off the interest and the principle on our loan so that the loan eventually gets to a manageable size. After 5 years we would like to rent it out and use neg gearing.

My question is should I put all my savings into paying down my PPOR first? Or should I do both, pay off the IO loan on the PPOR and at the same time save for a 20% deposit on the future IP? This second option might be more challenging

I would say do both...if you can.

 

[Propertunity]

Propertunity really gave a great explanation on negative gearing in a recent post. I read a book by Margaret Lomas, but I became utterly confused with the maths. So great job Propertunity

Why thank you

We've just brought our 1st PPOR.

Congratulations.

Our strategy is to pay off the interest and the principle on our loan so that the loan eventually gets to a manageable size.

That is a really sucky strategy if you don't mind my saying so - for 2 reasons:
1. Your mortgage should be "manageable" now or you should not have one (or at least one that big)
2. If you have any intention of turning it into an IP in future you should not IMO pay down Principal

My question is should I put all my savings into paying down my PPOR first?

Not if you are going to make it an IP

 

[see_change]

If you've got an offset account, try using that. Best of both worlds and gives better options moving forward

Spot on

Put it into an offest account and then withdraw it if you need to buy the next property.

Paying off my PPOR first was the worse advice I ever listened too. Took about five years to realise how wrong it was . Made a hell of a lot more money by not paying off loans.

Having said that we did sell out 19 IP property portfolio dwon to 7 IP's so we had money to spend in the current cycle ( which we've just started doing )

Cliff

 

[Rolf Latham]

I would advance it a little further depending on needs and capacities.

Id save the extra cash in an offset acct.

Say you have save 50 k in the offset and thats enough for your next IP purchase.

Dont spend the 50 k tax paid savings, but place a 50 k loan split into your home loan. Fully pay that 50 k split down with the 50 k cash and thence redraw from that split for your IP purchase.

While this doesnt change the overall debt position, it does change the proportion of deductible and non deductible debt.

Your lender or broker may be able to advise

ta
rolf

 

[BV]

Noodles

It doesn't make sense to pay down your PPOR loan or to buy anything other than your PPOR outside super.

I went to a SMSF seminar a few weeks back and it was an eye opener.
Even if you don't have a SMSF or aren't thinking of starting 1, the benefits of sallary sacrifising into super are too good to ignore and particularly if you are on a medium to high tax bracket and have a family.

Super is the ideal environment to buy IP's because your contributions are only taxed at 15% and the IP's in the end will be CGT free.
There are also additional benefits if we have a wife and kids and in the current environment where our PPOR loan repayments are low we have the ability to salary sacrifice part of our pretax wages into super.

Ofcourse you don't have to leave your super in the balance option, you can switch it to cash, fixed interest or something similar.
I don't know if you have been thinking about your super at all but switching is certainly something to think about.

IMHO

cheers

 

[JamesGG]

It doesn't make sense to ... buy anything other than your PPOR outside super.

That, of course, assumes that you are happy to retire late instead of early. And, that you don't want to use equity to put into further investments or maintain serviceability.

 

[BV]

That, of course, assumes that you are happy to retire late instead of early. And, that you don't want to use equity to put into further investments or maintain serviceability.

James
I'm planning to retire at 55 and it's early enough for me.
When you say " using equity to maintain serviceability"
do you mean accessing the equity using a LOC and using those funds to pay the interest?

 

[noodles]

If you've got an offset account, try using that. Best of both worlds and gives better options moving forward

JamesGG/See Change - My broker advised me to take up the BankWest Ultra loan that has an optional 100% Offset account. I'm given the option of paying $15 per month for the Offset account, where we can pool our savings and salary and thus reduce the overall interest payment.

Alternatively I could deposit my wage to pay off the loan, and live off my wifes income.

My broker advised me to take the second option so we could save $15.

1. Is paying the loan off with one wage the best option, or should I get the Offset a/c?

2. If we paid down the loan with my income, can I still pull out excess funds for a future deposit on an IP? Or can you only do this thru an Offset Account?

That is a really sucky strategy if you don't mind my saying so - for 2 reasons:
1. Your mortgage should be "manageable" now or you should not have one (or at least one that big)
2. If you have any intention of turning it into an IP in future you should not IMO pay down Principal

Propertunity - sorry mate I'm not being clear. My loan is manageable, even if interest rates were to double, we'll have no trouble paying off the mortgage.

Thanks for your replies

 

[JamesGG]

James
I'm planning to retire at 55 and it's early enough for me.
When you say " using equity to maintain serviceability"
do you mean accessing the equity using a LOC and using those funds to pay the interest?

That's cool. Time is relative.
Yes, I did mean using a LOC to pay interest. Frees up cashflow nicely. Main issue on the refinancing front though is more about using equity as deposits for future properties (or the lack thereof in super).

1. Is paying the loan off with one wage the best option, or should I get the Offset a/c?

2. If we paid down the loan with my income, can I still pull out excess funds for a future deposit on an IP? Or can you only do this thru an Offset Account?

$15 for an offset seems odd, but anyway. It's a small price. Seech probably explained the offset benefits better than I can; allows for much greater flexibility moving forward but means you pay about the same interest as if you were actually paying down the loan.

That said, if you took the broker's advice; in theory yes, you could redraw (funder permitting) on your loan for future purchases. The terms and conditions on your loan should detail that.

 

[Rolf Latham]

Hiya Noodles

The accounting mess will only get worse with pulling redraws from a PI PPOR loan for an IP.....................

In addition, unless you will live in that property until the day you die, set up that Offset account asap, and work out how to place that split loan once you have the equity for the next property purchase.

I suspect the question of what will you do with the property in the middle term may not have been raised, for it it were, your option 2 would never have been made an option.

ta
rolf

 

[gooram]

Noodles,

The benefits of the offset account vs paying off your loan directly are twofold:

1. The total of your loan is reduced by the total of your offset account, thus you only pay interest on the balance of your loan minus your offset total. Note that you are not actually paying off your loan.

2. If you decide to buy another PPOR and turn your current one into an investment property, you can move the entire balance of your offset account to a new offset account on your new PPOR. This reduces your non-deductible repayments on on your new place, and increases your deductible repayments on your investment.

I would imagine you could negotiate your way out of the monthly fee.