To keep or not to keep
- Thread starter Tranquilo
- Start date
Selling up may or may not be a good idea.
But do you realise that you could have been borrowing to invest. i.e. pay $200 off the home loan and then take $200 out to invest. This way you would be paying off the non deductible debt and increasing deductions while still maintaining the same balances on both. More money in your pocket. (using appropriate loan structures to maintain deductibility of course).
But do you realise that you could have been borrowing to invest. i.e. pay $200 off the home loan and then take $200 out to invest. This way you would be paying off the non deductible debt and increasing deductions while still maintaining the same balances on both. More money in your pocket. (using appropriate loan structures to maintain deductibility of course).
HI Terry your talking like debt recycling? I've been reading it here on SS until it made me crazy I just can't understand it.
Tranq,
My understanding is, if you are borrowing money for an income producing asset, then the interest on that loan is able to be claimed as a tax deduction.
However, you cannot claim a tax deduction for the interest which you pay on your PPOR loan because your PPOR is not an income producing asset.
When you take money of out your PPOR loan and use it to purchase shares or an IP, that money is now being used to purchase an income producing asset and thus the interest on that loan is now tax deductible.
I am not certain on the actual mechanics of loan structures, but that is my broad based understanding.
I guess it is debt recycling.
No one with non deductible debt should really be investing in anything directly. A better approach is to pay down the non deductible and borrow to invest.
For every $10,000 invested this would increase tax deductions by approx $10k x 5% = $500 every year. The overall balance of the investment loan and the PPOR loan will be the same - but it actually would be better as the extra tax deductions could be paid off the non deductible debt.
No one with non deductible debt should really be investing in anything directly. A better approach is to pay down the non deductible and borrow to invest.
For every $10,000 invested this would increase tax deductions by approx $10k x 5% = $500 every year. The overall balance of the investment loan and the PPOR loan will be the same - but it actually would be better as the extra tax deductions could be paid off the non deductible debt.
Could there potentially be issues with getting finance approval to redraw the cash?
E.g. say I've got a PPOR with an LVR of 95% with a sum of cash (say $10k) in the offset that I wish to invest in an asset, would it make more sense to invest this directly and forgo the tax benefit, instead of putting it on the loan and then redrawing it? I would presume if I put that 10k on to the loan, they may not let me redraw money until my LVR is at a certain amount?
I don't know whether or not the bank would actually have an issue redrawing up to , my dealings with banks is limited at this stage.
Ok, so you need to make sure your loan is establish with a redraw, or if possible, add a redraw to a pre-existing loan?
With regards to your second point, what if someone put $100k in to the redraw, then decides in January to invest $50k in to an investment, and then in July invest $50k in to another investment. Would they make two separate loans of for each investment?
That's of course assuming people can't get better returns elsewhere. Talking in absolutes is always dangerous imo
You're still using the $10k, you can just now claim a tax deduction on the interest on the cash, instead of not.
I don't see how $10k from direct cash or $10k from mortgage redraw would effect the investments rate of return?
Unless I'm missing some deeper knowledge or have misunderstood.
Can you redraw from a variable IO loan, assuming you drop the amount you want to redraw in to it first?
Why I was asking is. My PPOR doesn't have an offset and my only savings is in the managed fund which is $18000. Just to deposit wages in the offset is it really worth the annual fee.
I actually have $7000 in redraw because I was paying extra (which I have stopped now) because I was going to setup an offset.
If I was to redraw that $7000 and invest into the fund does that create a new loan? or just bring the balance back up.?
What if I ever made my PPOR an IP, hasn't using redraw just ruined my tax deductibility.?
Sorry if that's all over the place
I actually have $7000 in redraw because I was paying extra (which I have stopped now) because I was going to setup an offset.
If I was to redraw that $7000 and invest into the fund does that create a new loan? or just bring the balance back up.?
What if I ever made my PPOR an IP, hasn't using redraw just ruined my tax deductibility.?
Sorry if that's all over the place
Most loan products provide no limitations (or very few) on access to the redraw facility. In saying that though, if you are looking to employ a debt recycling strategy on a PPOR, you would want to split the redraw funds to a new discreet split to clearly delineate the deductible and non-deductible components. Putting funds directly onto your PPOR loan and then redrawing out for instantly for investment purposes is an accounting nightmare.
Why I was asking is. My PPOR doesn't have an offset and my only savings is in the managed fund which is $18000. Just to deposit wages in the offset is it really worth the annual fee.
I actually have $7000 in redraw because I was paying extra (which I have stopped now) because I was going to setup an offset.
If I was to redraw that $7000 and invest into the fund does that create a new loan? or just bring the balance back up.?
What if I ever made my PPOR an IP, hasn't using redraw just ruined my tax deductibility.?
Sorry if that's all over the place
The loan amount is just increased, not a new loan formed. Get onto your bank/broker ASAP to get your loans structured correctly so you can maximise your deductible debt, whilst minimising your non-deductible.
