Pay off investment property

Discussion in 'Property Finance' started by paguatao, 6th May, 2015.

  1. paguatao

    paguatao Member

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    Hi, hope this is right thread ... not too sure. In about 12 months, we may be paying off our home loan, so a couple of questions:
    1. Instead of paying the loan right off, I feel like I should leave a few k to keep the loan "open" - this is so that we can redraw if we need to, instead of applying for a whole new loan for whatever - renovations etc.

    Is this a good idea, I can only see it as a con, and paying very little interest a month?

    2. We will then have surplus funds, and I'm wondering if it's a good idea to start paying down our investment property (purchased 2007 for 305k)? Loan 318k, rental probably valued at 310k. The rent (360 pw) is just about covering the interest, insurance, rates etc.

    Always viewed it as negative gearing, but now, I'm trying to get a feel on whether we should start paying it off. This might seem like a basic question but I need some advice before I present my opinion to the OH! He's been disillusioned by the rental and the amount of capital growth so far, if he had his way he would probably sell it but I feel like we are just about breaking even, so with a few more years if we start paying it off and rent increases a bit we might start heading down positive cashflow.

    I would like to hold it (even though I have been on the disillusioned path as well) now that it's breaking even, still hoping for capital growth but positive cashflow would be a bonus.

    I doubt very much we will do any more investing in property, so would not look at using home as equity to refinance or purchase.

    Thanks for any advice :)
     
  2. jerrybee

    jerrybee Member

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    Don't pay it down. I can't think of any scenario where that would make sense. Put it in your investment's offset until you can find a better use for it.

    Not that simple. As I understand it, once you pay it down, even if you redraw it again later down the road you'll never be able to deduct interest paid on that part of it ever again. And even if you wanted to redraw, in many cases it'll be much more trouble compared to simply pulling funds from a regular offset. If you're in a jam, this will be important.

    The only time this makes sense is if you're terrible at managing your money and this is a means of forced savings. Or you have a gambling problem. I'd love to be corrected on this, there are people here on this forum that are much more knowledgeable than me about this.
     
    Last edited: 6th May, 2015
  3. Brady

    Brady Big 4 Banker

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    Pay funds into offset instead of redraw. Loan on interest only.
     
  4. paguatao

    paguatao Member

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    Sorry, I don't understand?? I don't have an offset account for the investment loan. The redraw option on my home loan is really simple, it's just like a transfer request.
     
  5. geoffw

    geoffw Untitled

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    It's really quite simple to set up an offset account. But it might not do any good if you are on an interest only loan in some circumstances.

    I had two loans when I set up an offset account. The offset against one loan didn't reduce payments, it only reduced the term. On the other account it reduced payments but kept the term fixed.
     
  6. Peter_Tersteeg

    Peter_Tersteeg Finance broker/strategist

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    If you don't have an offset account, then set on up. If you're with a decent lender it shouldn't be hard to do this.

    The difference between an offset account and using redraw will have a huge effect on the tax deductions available to you in the future, if you buy another PPOR.
     
  7. jerrybee

    jerrybee Member

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    That's why I said "in many cases", not "in all cases".
     
  8. paguatao

    paguatao Member

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    Thanks guys. I went and refreshed on how an offset account works ;). My lender does offer it but I'd just have to convert the loan into an eligible loan ($95 fee) and the offset account costs $10 per month. I guess I would just have to work out how much funds in the offset account is worth it and all ....

    Also, why wouldn't I want to try and start paying off the investment loan, to become cashflow positive and all? Just trying to get my head around - if we have an offset account, then we are paying less interest which means negative gearing is reduced anyway .... does that mean we are in effect "Cashflow positive" but without reducing the loan amount ....????
     
  9. Jess Peletier

    Jess Peletier Mortgage Broker, Perth

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    Exactly. This has exactly the same effect as paying off the loan, but gives you 100% control over your cash, where if it's into the loan account the bank has control of it.

    it also allows you to keep things flexible from a tax perspective - just say you wanted to buy a new home, or go on a holiday or whatever, you could pay cash from the offset and keep the IP debt fully deductible.

    If you paid off the IP and redrew the loan, you'd have a new non-deductible debt. It just keeps things flexible for the future.
     
  10. neK

    neK Member

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    What are your view on boxing yourself into a corner?
    Do you think its a smart move?
    Or would it be better if you a back door to exit out of in case you needed it?
     
  11. Heinz57

    Heinz57 Member

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    It is not illegal to pay off debt, if that makes you sleep better. But you may be in the minority on this forum.
     
  12. Terry_w

    Terry_w Member

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    Paying off debt is always a good thing.

    But not paying off debt can be a better strategy for a few reasons.

    1. Tax
    Say you used up your cash and paid $500,000 for an investment property. Or purchased an IP for $500k and paid down the loan.

    A few years later you go and upgrade your PPOR and buy something for $500k extra. All your cash is used up so you must thereore borrow to buy the new PPOR. Interest is not deductible.

    If you structured the IP so it had a $500k loan with $500k in the offset you could gain an extra $25,000 per year in tax deductions (assuming 5%) for the next 30 years plus. Huge savings.

    2. Further investing
    Say you wanted to go and invest in another property but could not longer qualify for a loan, you could use the cash in your offset account and indirectly claim the interest (as the interest on the loan securing the offset will increase).



    3. General sspending
    Say you wanted to 'retire' early and eat into a bit of your capital while you are waiting for the rents to rise, to sell a house, for the super to be released etc. You could just draw down from the cash in the offset and slowly have the interest on the loans increase - kind of like living off equity.

    4. Emergencies

    Say you were suddenly in need to large sums of cash - to buy a kidney maybe. You could just access your offset account.

    say you wanted to help a child buy a property - not really an emergency - but you could just lend them to full price in cash (taking a mortgage) - and you could claim the interest on the loan on the investmennt property attached to the offset account, even if the cash is used for your child's main residence

    etc.
     
  13. wylie

    wylie Member

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    Once you have spare money and no PPOR debt, I agree with the others that you keep your investment loan and put any spare funds in an offset account. That gives you more flexibility.
     
  14. Deltaberry

    Deltaberry Member

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    paguatao good problem to have.