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[Success]

Question -

Currently paying 4.91% p.a I/O Interest on an IP. Ubank is offering 5.21% p.a on deposit.

Am I better off extracting equity from IP at lower rate and pouring into savings account from Ubank ?

http://compare.smh.com.au/savings-accounts?utm_source=SMH&utm_medium=Rainbow&utm_campaign=Savings_Lips&s_rid=smharticle:rainbowstrip:content1:30-09:savings_lips_ranbow_172x115

 

[steveadl]

Guess it depends.

How secure are those rates, and for what term? Are they changing in 5 months?

How much money are you talking? ie. $300 profit each year for every $100k switched, so would need to transfer an awful lot to make it worthwhile.

Those two questions are before you even get started on the tax equation of both sides ie. tax deduction for IP loan vs tax paid for interest income on deposit.

 

[Success]

Guess it depends.

How secure are those rates, and for what term? Are they changing in 5 months?

How much money are you talking? ie. $300 profit each year for every $100k switched, so would need to transfer an awful lot to make it worthwhile.

Those two questions are before you even get started on the tax equation of both sides ie. tax deduction for IP loan vs tax paid for interest income on deposit.

I have $170K of equity I could draw out. The tax situation works out ... because I am drawing out equity to INVEST the interest on this equity becomes a deduction. Who cares about tax if you are making money. In this case it may be an extra few $$$'s for little work.

 

[Aaron Sice]

i'd rather take no work for a few less $$$ personally....

 

[steveadl]

I have $170K of equity I could draw out. The tax situation works out ... because I am drawing out equity to INVEST the interest on this equity becomes a deduction. Who cares about tax if you are making money. In this case it may be an extra few $$$'s for little work.

OK so $170k equity draw out for 1yr:

$170k @ 4.91% = $8,347 interest cost
gives you tax deduction off other income of say 30% = $2,504

$170k @ 5.21% = $8,857 interest income
taxed at 30% - $2,657
= $6,200

Total income (tax saving + interest income - tax paid on interest gained) = $357

Rough figures obviously, but unless I'm forgetting something it looks like you're talking about $357 overall improvement in position for the year, assuming of course no change in either rate. Big effort for very little return I'd say.

 

[Success]

Nice ... can you pls plug in the numbers you used for your formula so I can better see ?

 

[kum yin lau]

Hi, sorry I have to use a word I don't normally like to use.

The stupidest idea I've ever heard yet. Reason? To take such a risk for 0.4%?

KY

 

[steveadl]

hmmm well they're pretty much there, but perhaps I didn't explain myself well.

It basically comes down to income vs expense:

Income:
$8,857 interest income
$2,504 tax saving from declaring interest expense below
= $11,361

Expense:
$8,347 interest expense
$2,657 tax paid on interest income above
= $11,004

So Total Income less Total Expenses
= $11,361 - $11,004
= $357

The theory is sound, the problem is you would need a larger sum to make it worthwhile and again it relies on interest rates remaining at the same differential. If the banks put the loan interest rates up without increasing the deposit rates the same amount, you're profit will evaporate and see you in loss.

 

[Aaron Sice]

$357....that's the hullabaloo....$357....

 

[Success]

Hi, sorry I have to use a word I don't normally like to use.

The stupidest idea I've ever heard yet. Reason? To take such a risk for 0.4%?

KY

OK - it's not a lot of money. However if you had $600 or 700K and a few mins it may be worthwhile.

Where is the risk ?

 

[Hooray]

OK - it's not a lot of money. However if you had $600 or 700K and a few mins it may be worthwhile.

Where is the risk ?

That the mortgage rate goes up.

 

[steveadl]

Where is the risk ?

1. Mortgage rates go up.
2. Deposit rates don't keep up.
3. Opportunity cost of just sitting $600k+ in a cash account without leverage.
4. Minimal profit margin would require strategy to be taken over an extended period of say 1-3yrs to get any real income out of it, which in turn amplifies risks 1-3 all over again.

For investing $600k with that amount of risk - you'd want a lot better return than $2,142 per year.

 

[Success]

1. Mortgage rates go up.
2. Deposit rates don't keep up.
3. Opportunity cost of just sitting $600k+ in a cash account without leverage.
4. Minimal profit margin would require strategy to be taken over an extended period of say 1-3yrs to get any real income out of it, which in turn amplifies risks 1-3 all over again.

Money is at call !

Anyways ... back to focussing on making a better return. Boom times are coming !

 

[steveadl]

Anyways ... back to focussing on making a better return. Boom times are coming !

Now you're talking!

 

[The Y-man]

I have $170K of equity I could draw out. The tax situation works out ... because I am drawing out equity to INVEST the interest on this equity becomes a deduction. Who cares about tax if you are making money. In this case it may be an extra few $$$'s for little work.

If you can draw down at no extra cost, do it. If you found $357 on the street, do you walk by?

We did similar things with credit cards etc.

Cheers,

The Y-man

 

[Aaron Sice]

i'd rather the $600k in an offest account personally.

 

[kum yin lau]

Hi, Yman is right even though I wouldn't do it the way you would.

If home loan is the fixed 12 month honeymoon low rate, then you have about 12 months 'free' money.

I have a higher appetite for risk, I' ll buy shares but then I live by the sword, might die by the sword.

KY