Question about IO PPOR Loan with Offset

Hi everyone,

Long time no see from me. Ive been a busy little bee selling my ring off in the car sales industry. Thoroughly enjoying it, although the 65 hr weeks are getting to me a little.

Anyway, the reason im popping up again is to clear something up that a friend of mine at work brought up with me while talking property.

Now im on a small salary but sometimes receiving lump sum bonuses, my partner and I have been considering re-financing our PPOR loan to IO with an offset account.

Questions I have are as follow.

1. Is this a loan lenders will offer for a PPOR?
2. If I keep pumping in extra money into the offset account (My whole wage each week), what happens if/when the amount in the offset is equal to the original loan amount? (We will use the credit card method 55day interest free to live off each cycle) Do we just pay zero interest each week until the end of the loan term?


Any questions please ask. We want to use this method to pay off our PPOR as soon as possible. Is this a method you would recommend?

Cheers, Mick
 
1. If you refinance the PPOR, that doesn't make it deductible. The only way to turn PPOR debt into deductible debt is to pay it off with cash, then refinance and use those new funds to do investment activities.
2. If the offset is more than the original loan amount, then you pay no interest. You don't earn interest on the excess though.
 
1. If you refinance the PPOR, that doesn't make it deductible. The only way to turn PPOR debt into deductible debt is to pay it off with cash, then refinance and use those new funds to do investment activities.
2. If the offset is more than the original loan amount, then you pay no interest. You don't earn interest on the excess though.

Thanks for the reply.

We understand this will not be deductible as its not an investment loan.

Ah yes so i we have a loan amount of $150k, and we have $150k sitting in the offset account, we effectively don't have to pay anything each week to the bank. In that case could we then re-finance the loan back into a P&I and payout the loan with the huge offset funds?

Cheers, Mick
 
Thanks for the reply.

We understand this will not be deductible as its not an investment loan.

Ah yes so i we have a loan amount of $150k, and we have $150k sitting in the offset account, we effectively don't have to pay anything each week to the bank. In that case could we then re-finance the loan back into a P&I and payout the loan with the huge offset funds?

Cheers, Mick

Yes that is correct (if you wanted to do that). But why do you want to refinance? To buy an investment property after paying off your own home?
 
Yes that is correct (if you wanted to do that). But why do you want to refinance? To buy an investment property after paying off your own home?

Yep. We would like to pay off our PPOR before investing in rental property. I guess the reason behind this is because ill always be in commission based jobs and the wage's go up and down so much it would be a huge burden off our backs if paid off in full, or at least a huge chunk of it in the next 7-10years.

Cheers, Mick
 
Mick

You wouldn't need to refinance the loan back to PI to pay it off. I think nearly all IO loans would allow you to pay extra off the loan at any stage.
 
Mick

You wouldn't need to refinance the loan back to PI to pay it off. I think nearly all IO loans would allow you to pay extra off the loan at any stage.

Good to know. We will be tipping in extra where we can and once up to the original loan amount the house is 100% ours. :D

Should only take 5-7 years at the rate we are going.

Cheers, Mick
 
While it sounds warm and fuzzy to have your PPOR paid off, remember if it's in your name and if you have other loans (property loan, margin loan, personal loan, credit cards, etc) in your name and you default on those, your PPOR is still up for grabs.

For example, it may in fact be 'safer' to have a loan against the PPOR but have a substantial offset balance against it, compared to just having the PPOR unencumbered. Just because you have equity doesn't mean you can always access it, and certainly not always quickly and easily.

Even if you own your own home 100%, what then? It doesn't produce income. What happens after your working life ends? What do you live off?
 
All fair points Alex.

We will live off the same thing we would if we didn't own our PPOR outright, investments. :D

We plan to heavily invest during and after we pay off our PPOR. W may even convert into an IP in future and have it +cashflow for some income. Will be in the wifes name so minimal tax on any income it generates.

Cheers, Mick
 
We plan to heavily invest during and after we pay off our PPOR. W may even convert into an IP in future and have it +cashflow for some income. Will be in the wifes name so minimal tax on any income it generates.

By your own admission, it'll be 7+ years before you pay off the PPOR. That's 7 years of returns on other investments you don't get, 7+ years of investment experience you don't accumulate, and most importantly, 7+ years of financial inertia.

Purely on the numbers, the return on paying off the loan is about 10% pretax. The return on investments should be, and likely will be over the long term, more than this. Add in the extra returns from refinancing investments to by more investments, and the differences will be significant.

You pay off the loan. Then what? You're 7+ years older, how are you going to 'invest heavily'? You'll be feeling so good that you have no PPOR debt. Most likely as the interest payments wound down over the years and your disposable income went up, your spending has moved up to match it. Would you really refinance against it again and take on more debt?

There are, of course, worse things than being in your 40s with a fully paid off PPOR, but 7+ years is a long time, and you have the opportunity (recognising that it involves taking on additional risks) to do much better financially than this. You may well decide that it's not worth the additional financial risk to do this, and stick to paying off the PPOR. Which is fine, but you really want it to be an informed, considered decision and not just some knee-jerk reaction to the 'debt is bad' bogeyman.

To invest only after the PPOR debt is paid off deprives you of years of investment experience, which accumulates when you're investing small amounts as much as when you're investing large amounts.

Putting the investments in the wife's name might be too simplistic. e.g. if you have children, or when you scale back work, it may make more sense to put the investments in a family trust.
 
I agree with alex. Transferring the PPOR to/from your wife's name can be done any time for very very minimal cost. It can even be added back to your name later on if you change your mind. The most important thing is to get started investing early - because of the miracle of compounding interest/returns.
 
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