Question about Cba MAV home loan

[Chloe]

I've got a question about my soon to be new MAV home loan. Going in today to sign the paperwork for it a and choose a credit card.

I'll of course have any extra money sitting in the offset. Does this mean I should make the minimum required repayments and anything extra should go in the offset?

For example, if my repayments are 761.86 per fortnight, should I keep that as the minimum that I pay and not get them to take eg, $800.00 just to round it off and pay a bit more??
Would I be better off just putting extra $$ into the offset instead? This property could one day potentially be an IP.

Thanks

 

[Peter_Tersteeg]

The minimum repayments will be automatically debited from the account you nominated (the broker may also be setting up a new account for this purpose). You probably don't need to manually transfer anything. If you've got any surplus funds, make sure a MISA offset account is set up and park them there. This is a separate account to where your repayments are coming from (the CBA do their offset account a bit strangely).

From your description, I'd say your loan is principal & interest. If you believe this property will become an investment in the future, an interest only loan might be better suited to your future needs. Putting surplus funds in the offset account will be more tax effective than if you max extra payments as you've described.

 

[Chloe]

Thanks PT, That's what I thought.
Yes it's P&I.

 

[InspiredByProp]

Regardless if the property will become PPOR or IP in the future...
What is the benefit of using offset account with P+I payment type ?
I thought there is a cost associated with offset account $395+, whereas you can simply use the basic home loan with redrawal which doesn't annual fee and still put all the excess money into the home loan.

 

[Peter_Tersteeg]

The benefit of using an offset account (irrespective of the repayment type) is that it keeps the money you've saved separate from the money you've borrowed.

This can have significant tax implications if the property is for investment, because you've presumably paid income tax on your savings, whilst the loan itself is tax deductable. There are two different purposes at work, so it's best to keep a clear division of the money.

There's another thread running at the moment which seems to be touching on the same issue:
http://somersoft.com/forums/showthread.php?p=994229#post994229

 

[tobe]

Regardless if the property will become PPOR or IP in the future...
What is the benefit of using offset account with P+I payment type ?
I thought there is a cost associated with offset account $395+, whereas you can simply use the basic home loan with redrawal which doesn't annual fee and still put all the excess money into the home loan.

Not all lenders charge $395 pa for an offset account BTW. And not all offset accounts are equal. theres MISA, and then theres fully transactional offset accounts for instance....

 

[Rolf Latham]

Thanks PT, That's what I thought.
Yes it's P&I.

blech

Usually not a good solution.

Ideal for those that are "bad" with money, otherwise loaded gun issues long term


ta
rolf

 

[Chloe]

RL, what do you mean?

Having an offset altogether?

 

[Rolf Latham]

RL, what do you mean?

Having an offset altogether?

PI

In general, for those that are ok with money, IO with offset provides for more options into the future


ta

rolf

 

[Chloe]

I thought that once I was ready to either turn my ppor into an IP or stay there and buy an IP I could then assess my loan and look at changing it to interest only.
I don't yet know which of these 2 paths I will go down.

 

[Rolf Latham]

I thought that once I was ready to either turn my ppor into an IP or stay there and buy an IP I could then assess my loan and look at changing it to interest only.
I don't yet know which of these 2 paths I will go down.

I understand that logic.

Any principal that you have paid off will not be tax deductible..........and you will have to borrow more for your new place.

Assume for a minute you have a 100 k loan
in x years fully paid down

U now make that place an IP

And,because you have fully paid off the loan, you have no cash left and now need to borrow 210 for the 200 k ppor.

end result

1. "All" rental income on the new IP ( previous PPOR) is taxable because there is no interest dedn
2. The full 210 you have borrowed for the new PPOR is all non deductible.


you can prevent this by having the loan as IO and with 100 % offset from day one. save 100 k in the offset.

When you buy the newppor,use 100 k from the offset and borrow 110

end result

1. 100 worth of interest dedn against the rental income
2. Only 110 for the new PPOR is non deductible

because this benefit reverse compounds , such a simple thing can benefit you by 10s or even 100s of thousands over a lifetime

ta
rolf

 

[Chloe]

So If I changed it to IO in perhaps 12 months, would that be better than keeping it P&I?

Because I don't have a concrete goal of what is going to be an IP and in how many years... Could be 18 months or 5 years, in the meantime I just assumed that a P&I would meet my needs for the short term.

Wish we were taught these things in school!

 

[Rolf Latham]

If you arent sure then the default setting should be IO from day one.

Dont be hard on yourself or the system here, lots and lots of brokers and bankers dont fully understand this stuff either

ta
rolf

 

[Chloe]

One thing in my favour is that I wouldn't have paid of that much principal to make a huge impact.

 

[Peter_Tersteeg]

I'd suggest changing the loan to an interest only loan before settlement if there's still time. If you're out of time, do this as soon as you can after settlement.

 

[Chloe]

Thanks PT,

So even if we love living in this house and I decide for it to remain my PPOR and then look for something else as an IP?

 

[Marty McDonald]

It's old so old school to pay your loan off don't ya know! But seriously if in doubt you can't beat IO with offset.

 

[Peter_Tersteeg]

Thanks PT,

So even if we love living in this house and I decide for it to remain my PPOR and then look for something else as an IP?

No reason you can't pay it off if you decide it's the place you're going to grow old in.

I/O with offset just gives you options and more flexibility.