Should I pay off some of the Principal?

Hi All,

Need some investing advice on what to do with the extra funds we have saved.

This IP is part of a family investment and due to monthly contributions from everyone we have been able to save $8000 now.

Given the low interest rate at the moment, the rental basically covers the interest only repayments. The funds we have saved are there as a safety measure in the case the IP becomes vacated for a long period of time, if major repairs are needed or if the tenants do not pay rent on time.

Give that the rental is covering the interest only repayments now, some members want to stop the monthly contributions - and I'm fine with this. But my question is - should we use some of the extra funds to pay off the principal and leave a bit in the account for a rainy day - is this a good strategy because basically the extra funds is sitting in an account not doing much for us? I guess if we do pay off some of the principal it would mean that our interest only repayment would be a little less as well because the principal has come down a bit.

Any help would be greatly appreciated.

Thanks.

Andy
 
Hi Andy,

One thing to consider would be to organise an offset account for the IP. These type of accounts are basically deposit accounts that reduce the interest payable on the loan amount by offsetting the loan amount by (usually) the amount in the offset account.

Speaking to a good accountant will hopefully clarify this further for you, or I am sure there will be some somersoft regulars who will be able to go into the detail of it all :)

Otherwise if the soul goal of your investment is to have the 1 IP paid off as soon as possible then paying extra principal payments, as regularly and often as possible is the way to go :)

Congratulations on your investment btw.
 
Thanks Jonril. I did think of the offset account too but couldn't be bothered with the family politics which goes to getting anything done/approved.

Cheers for the reply.

Andy
 
Andy, do you have a PPOR mortgage? You would be much better, if everyone can agree, to pull your share of the savings back and paying down your PPOR mortgage instead. I can only assume the $8000 is saved in a seperate account to your IP Loan (otherwise you wouldn't be asking the question) so tax wise it would be ok to take your share out and use for non-investment purposes.

Gools
 
Thanks Gools. Yes I do have a PPOR mortgage.

If we were to use some of the savings for other purposes I would be more inclined to leave about $3000 in the account to cover us for a month of loss rent (tenant pays $350/wk) + unexpected costs.

How we then use the other $5000 is food for thought. Some want to use it to pay down the principal, some don't want to touch it, some probably wouldn't mind getting their share back to use for other things like Gool has alluded to hehe...that's the family politics for you :)

Cheers.

Andy
 
Here is a statement from one family member who probably knows more than me. Not sure what to make of it.

"Pointless to pay off principal because it's an investment.

Paying off principal = less interest paid = less claimed back on taxes.

Also, more CGT when we go to sell since the loan to pay back will be less."

So is paying the principal off a bad idea then??
 
Exactly right. The interest payments on the IP are tax deductible. Why would you want to reduce them? The interest payments on your PPOR are not tax deductible so is much better to reduce them!!

The CGT statement is incorrect. CGT has nothing to do with the loan balance. It is sold price less the cost base from purchase. The loan balance does not come into it.

Gools
 
I agree with Gools.

Distribute the money back to the individual family members.

That is, unless you foresee future expenses where the money may be needed, i.e., upcoming repairs etc. where the money may be needed.
Marg
 
re-distribute or set up an offset account - my preferences.

offset accounts mean you don't have to re-fi or re-draw to access the money should you need it later.
 
Top