Pay off principal or have offset account ??
- Thread starter molly1a
- Start date
its always good to pay off loans.
Just do it at YOUR benefit.......that is place the cash into the offset.
If you will ever turn the PPOR into an IP you will be glad
ta
rolf
Are both loans IP or is one PPOR and one IP?
I think he/she's saying he/she has IO loans for IPs. He/she read that it's good to pay off principal as well with excess money so he/she wants to ascertain whether it would be effective to convert the IO loans to P+I so rather than have money sitting in an offset account, he/she uses that money to pay off some principal so that he/she reduces their loan and therefore has more equity in the property.
Correct me if I'm wrong with the interpretation but I'm pretty sure that's what they meant.
In relation to answering the question - obviously the brokers here can provide more reliable advice but obviously the suitability of paying off principal will depend upon your own circumstances and what your strategy is.
Generally though, if you intend on purchasing more property you may be best keeping the IO loans and keep the additional funds in an offset account to reduce your interest payments. This allows you to more positively gear your properties, which means they will tend to support themselves and you can use your excess cash + equity to acquire more property.
If each property is supporting itself and providing cash on top, then you could own as many properties as you want without any hassles (as long as you can come up with a deposit for each).
If you convert to principal + interest, your properties may then be negatively geared. Depending on your income, you will only be able to support a small handful of properties as each one of them is costing you money to hold, on a weekly basis.
I hope this helps somewhat. Sorry if I've misinterpreted your question, molly1a.
Correct me if I'm wrong with the interpretation but I'm pretty sure that's what they meant.
In relation to answering the question - obviously the brokers here can provide more reliable advice but obviously the suitability of paying off principal will depend upon your own circumstances and what your strategy is.
Generally though, if you intend on purchasing more property you may be best keeping the IO loans and keep the additional funds in an offset account to reduce your interest payments. This allows you to more positively gear your properties, which means they will tend to support themselves and you can use your excess cash + equity to acquire more property.
If each property is supporting itself and providing cash on top, then you could own as many properties as you want without any hassles (as long as you can come up with a deposit for each).
If you convert to principal + interest, your properties may then be negatively geared. Depending on your income, you will only be able to support a small handful of properties as each one of them is costing you money to hold, on a weekly basis.
I hope this helps somewhat. Sorry if I've misinterpreted your question, molly1a.
Actually the opposite, paying off principal will gradually make a property more positively geared (or less negatively geared).
Yes it will be cashlow negative though.
Yes, but it will take significantly longer. You're usually best off using those extra funds to fund additional IPs, or reno to create additional equity etc.
Age long debate which has to come down to personal preference.
Financially speaking you would be better off having all funds in offset account, allowing you flexible access to the funds for later investment if required. IMO
Most important thing overall is that your NET position is decreasing at the same rate either way
no point having IO if your not putting those extra funds into the offset!
Financially speaking you would be better off having all funds in offset account, allowing you flexible access to the funds for later investment if required. IMO
Most important thing overall is that your NET position is decreasing at the same rate either way
no point having IO if your not putting those extra funds into the offset!
When it comes to claiming an investment loan as a deduction – only the interest portion of the loan is tax deductible. The principle portion is not. Therefore, if you have an investment loan, and you decide to pay off some of the principle each repayment, you’re effectively reducing this tax deductible debt.
This can be a costly mistake if you also have non-deductible debt such as a home loan on your PPOR, car loans, personal loans, credit cards, etc.
If you want to pay down any debt – it is this non-deductible debt that you should try and knock on the head first. It simply doesn’t make financial sense to pay down your deductible investment debt when you also have non-deductible debt.
So what’s the ideal structure?
Generally speaking, it’s ideal to have all of your investment loans set up as interest only.
With your PPOR debt, there are two choices to consider. If you are a disciplined saver and feel that your PPOR will one day be turned into an investment property, then it's best to also set this loan up as interest only. However, it's important that an offset account is set up against this loan so you can continue to make the equivalent principle repayments regularly into the offset account. The offset account is also a very handy place for parking any spare savings.
Why is it best to have my PPOR loan as interest only if I think it’s going to become an investment property? Because this debt will become deductible in the future – so you shouldn’t reduce it now.
Instead, you can place your money into the offset account which will reduce your PPOR interest repayments whilst the funds are sitting in the account. When this property becomes an investment property in the future, you can move the funds from your offset account on to your next PPOR. This way, you've increased your tax deductible debt and reduced your non tax deductible debt.
The interest only with an offset account doesn’t work very well for someone who isn't a disciplined saver and will be tempted to simply make the minimum interest repayments.
If you're not a disciplined saver and have no desire to convert your PPOR into an investment property at some point, then it's best to have a principle and interest loan on your PPOR. Once you've paid off your PPOR loan and any other non-deductible debt, you may wish to start paying down your investment loans.
So in a nutshell, interest only for all loans with an offset account set-up against your PPOR loan can be a great overall structure – particularly if you think you might turn your PPOR into an investment property at some point. On the flipside, if you have no desire to turn your PPOR into an investment property down the track and you are not disciplined with money- then it’s best to have interest only against all investment loans and principle and interest against your PPOR.
p.s - I'm not an accountant, so always seek professional advice on taxation matters.
Cheers
Jamie
This can be a costly mistake if you also have non-deductible debt such as a home loan on your PPOR, car loans, personal loans, credit cards, etc.
If you want to pay down any debt – it is this non-deductible debt that you should try and knock on the head first. It simply doesn’t make financial sense to pay down your deductible investment debt when you also have non-deductible debt.
So what’s the ideal structure?
Generally speaking, it’s ideal to have all of your investment loans set up as interest only.
With your PPOR debt, there are two choices to consider. If you are a disciplined saver and feel that your PPOR will one day be turned into an investment property, then it's best to also set this loan up as interest only. However, it's important that an offset account is set up against this loan so you can continue to make the equivalent principle repayments regularly into the offset account. The offset account is also a very handy place for parking any spare savings.
Why is it best to have my PPOR loan as interest only if I think it’s going to become an investment property? Because this debt will become deductible in the future – so you shouldn’t reduce it now.
Instead, you can place your money into the offset account which will reduce your PPOR interest repayments whilst the funds are sitting in the account. When this property becomes an investment property in the future, you can move the funds from your offset account on to your next PPOR. This way, you've increased your tax deductible debt and reduced your non tax deductible debt.
The interest only with an offset account doesn’t work very well for someone who isn't a disciplined saver and will be tempted to simply make the minimum interest repayments.
If you're not a disciplined saver and have no desire to convert your PPOR into an investment property at some point, then it's best to have a principle and interest loan on your PPOR. Once you've paid off your PPOR loan and any other non-deductible debt, you may wish to start paying down your investment loans.
So in a nutshell, interest only for all loans with an offset account set-up against your PPOR loan can be a great overall structure – particularly if you think you might turn your PPOR into an investment property at some point. On the flipside, if you have no desire to turn your PPOR into an investment property down the track and you are not disciplined with money- then it’s best to have interest only against all investment loans and principle and interest against your PPOR.
p.s - I'm not an accountant, so always seek professional advice on taxation matters.
Cheers
Jamie
Let's say you're displined with $, any dis-advantages to have it all in IO loan for PPOR + IP?
No, there is not. The only possibility I could think of is if your offset account is with the bank you do business with and they freeze your transaction accounts - but that would stuff you up even with P&I.
Kudos to you Jamie, make this very clear..
I have situation and require some advice
My friends setup PPOR loan (PI) without offset - $400k, down the track he pay some of the loan to $200K.
Now he want to change PPOR into IP, he learn his BIG mistake and setup offset.
Related to tax deduction, is there any way to "re-engineering" the loan. So he can maximise tax return?
or he should setup LOC by draw down equity to invest another IP?
thanks
