Whats my best option?

Hi all,

Just thought I would post to ask what my best option is at present & also perhaps confirm if my current plan is ok...

Situation:
* I own 1 IP at present. Paid: $190000. Currently owe: $95000.
* Paying P&I making double the required repayments.
* Currently have $10000 in a savings account (5%p.a) for using towards purchase costs on a second property when I make the decision.

Questions:
1. Should I keep this savings account or use funds to reduce the $95000 right now?
2. Instead of making double repayments should I pay the funds into my savings account for using on the next IP ensuring the first IP stays - geared?
3. I have a pre-approved loan, valid for 3 months. Do some banks offer approvals for longer durations (ie 6months)?
4. What is an offset account that I hear people mention?

Sorry for so many questions...
 
Hi,

Stop making double repayments.
Change your Loan to IO.
Setup an offset.
Put ALL your savings into the offset.
Put your double payments into the offset.
Setup a line of credit secured over IP1 to use for closing costs etc.
Find property.
Arrange a new, non x-coll loan.
Draw down on LOC to use for costs.
Buy IP2.


1. Should I keep this savings account or use funds to reduce the $95000 right now?
Open an offset, and put this cash in there.

2. Instead of making double repayments should I pay the funds into my savings account for using on the next IP ensuring the first IP stays - geared?
You should definitely put the funds into the offset account.. if you can afford to be makin double payments, you can most likely afford to buy more.

3. I have a pre-approved loan, valid for 3 months. Do some banks offer approvals for longer durations (ie 6months)?
dunno sorry.. i think i read something on here in the last few days about pre-approvals though.

4. What is an offset account that I hear people mention?
an offset account is a "holding" account - it's linked to a loan, and you put your money in there.
It earns no interest, BUT, the money in there is "offset" from your loan balance.
Say you have a 95K loan, and you are being charged interest on that at 8.5%
If you have 10K in your offset, then you are only being charged interest on 85K at 8.5%....
This is essentially tax free income.

The problem with your savings account that I can see is, while it's a good idea to save, and i understand your motives and desires to do so, you earn interest on that account, and lets say 10K at 6.5% that's what, 65$ a month ? so thats 800$ a year of income, that you have to pay tax on. (Thats right, you pay tax on interest earned in bank accounts..)
With the offset account, sure, you aren't earning interest at 6.5%, but you are saving interest at 8.5% (based on the above figures i quoteD)
AND there is no tax on this...
 
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Stop making double repayments.
Change your Loan to IO.
Setup an offset.
Put ALL your savings into the offset.
Yes I agree offset account is the way to go... you use the money to reduce the interest you pay on the loan. For example, if your loan is 8% interest... it is like earning 8% interest on your $10k plus you don't pay tax on it. You currently earn 5% minus tax.

This is the best way to go. Just make sure it is a 100% offset account as some lenders have less than this. This should be the first step & then look into changing to interest only and make the extra payments into the offset.
Steve
 
Thanks for the advice,

I have just had a look at my lenders website.
I am not sure I qualify to have an offset account...

A 100% offset is only an option on their 'premium loan' products. But there is mention of a partial offset for other accounts. How does a partial option work?

My loan is currently P&I with a fixed rate for 5 years.

Thanks,
 
Note that in your case, having already put so much extra into the PPOR loan, it might make more sense to refinance the whole thing to 80% and use THAT to invest. If you just use the extra money in the offset, even to buy an IP, it may not be deductible.

Speak to your mortgage broker / accountant on this.
Alex
 
Hi all,

My last question was not really answered:

I have just had a look at my lenders website. I am not sure I qualify to have an offset account...

A 100% offset is only an option on their 'premium loan' products. But there is mention of a partial offset for other accounts.

How does a partial option work?

My loan is currently P&I with a fixed rate for 5 years.

Thanks,
 
Hi all,

My last question was not really answered:

I have just had a look at my lenders website. I am not sure I qualify to have an offset account...

Ask them. "Premium" usually means "you have a clean record, and you have a job". If they don't give it to you, threaten (nicely) to take business elsewhere.

Cheers,

The Y-man
 
Brad,

Seeing that you have a fixed loan and considering that your loan is not high
I wouldn't be that worried about restructuring the loan at present.
The suggestions about offset and a different structure are good
but in your case it depends on what you intend to do in the future.

Refinancing or restructuring the existing fixed loan will have costs.
IMO in this case you can continue doing what you have done so far.
If in the future you decide to buy more IP's you can use the existing equity in your first IP
or you can break the fixed loan and redraw funds to use as a deposit for your next IP.

So it doesn't really matter what type of loan you have now,
but if in the future you decide to buy more IP's or a PPOR I strongly suggest
you look at structuring your loans differently.
At that time you could also look at possibly refinancing your old loan and possibly package it
with 1 lender so that you get a discounted interest rate.
Many lenders will give you a 0.7% discount for total borrowings of $250K and above.
Cheers
 
Last edited:
I forgot to mention that putting the $10K into your existing IP loan rather than leaving it into the savings account is probably not worth the hassle.

Your 5% earnings is taxable income so depending on your tax bracket you will be left with 3-3.5%
but on the other hand your 8% interest payments are tax deductible
so you get about 3-3.5% back from tax so financially you are not better off
either way and it doesn't really matter if you left the $10K where they are.

Cheers
 
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