Really need help in these financial questions…

IO with an offset account is my suggestion.

Pay down as much as you like in the offset but the money is there to use as you wish.

If you do use it for personal purposes then you wont jeopardise the tax setup.

This is quite important if you choose to buy a PPOR in the future.

Cheers,

Simon Macks
Residential and Commercial Finance Broker

[email protected]
0425 228 985

Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.

Hi vernon

1/ Don’t bother with a 1 year fixed. You may as well take a “honeymoon” rate for a year then fix and get the advantage of ultra cheap 1 year honeymoons.

The disadvantage of fixed rates

1/ What is what is known as “break costs”. Thats the cost for the lender of redeploying the money at the market rates at the time multiplyed by the term you have left to run on your fixed rate. This occurs if you decide to break out of the loan before the fixed period is up. It could be (and quite often is) thousands.

2/ Usually you cannot make additional payments to the loan during the fixed rate period

3/ You do not have the flexibity of “redraw”

4/ Banks with “offset” accounts give you a “manufactured” flexibility for 2 & 3 but the interest that is offset is just what you would have normally earned in the savings account anyway at 3%.

Advantages

1/ You know exactly how much you are paying every month and don’t have to stay glued to the radio the morning the RBA meet hoping rates have not gone up.

2/ You can use “offset accounts” to “manufacture” some of the flexibility.

Things to consider

A/ How long you are going to hold the property for?

B/ How likely is that to change due to other circumstnaces like losing your job or having a baby?

C/ How much do rates have to go up by and by when before you are better off fixing, and is that likely?

D/ Do you have another mortgage?

Another Options

1/ Consider a longer term and apply the above tests. ie 5, 7 and 10 years

2/ COnsider fixing 1/2 and leaving 1/2 variable. Add the 2 rates and divide by 2 and thats the effective rate you are paying by doing this. It gives you the flexibility of the variable and the security of the fixed. If rates rise, your effective rate only goes up by 1/2 hte rate rise and you still get 1/2 the benefits of the rate fall. You still lose if you pay out early.

The advatages of Interest Only.

1/ Lowest possible mainstream monthly payment.

2/ The whole of the payment is tax deductable on Investment Loans.

3/ With most variable rate IO loans you can make additional payments and “redraw them”

4/ You can “elect” to make extra payments making it a P&I at any time.

5/ Long term the property increases in value and the rent goes up but the loan remains the same. 20 years ago in Sydney if you had bought a $100,000 property and borrowed $80,000 Interest Only (average price and average loan). you would still owe $80,000 but your property would value at $800,000 and rent would be around $650 a week.

The disadvantages

1/ The loan never reduces.

Things to consider

If you have an owner occupied home loan, then definitly go for Interest Only on the Investment loan and use the additional to pay extra off your home loan. (One is Tax deductable, the other is not so clear the one without the tax advantages first).