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Thanks guys, this is the type of discussion I was hoping for. I think that I will give it a crack. Capital gain is too good to turn down. Also – for the size of the outlay, the inclusions are rather minute in comparison
If you assume the loan is $50,000 – and interest rate 6.4%
Then he will save $3200 in a savings account, then get charged tax, then have to pay $3200 to the Interest only account – Ie – he will loose whatever money he pay’s in tax ( by his top marginal tax rate amount ) on the savings account profit.
If he puts it in an offset account, then he saves $3200 worth of interest per year.
It doesn’t matter when the tax get’s paid, it’s still a loss of that amount. The other factor is that savings rates are below mortgage, so that loss will actually be a lot higher % wise in reality, because the same rates are never involved in reality.
Terryw wrote:Would you rather earn $100 in interest or save $100 in interests on the home loan?Both would result in the same savings – assuming the same entity is involved.
The $100 interest would be taxable. The $100 in interest saved would mean you have $100 less in deductions which means your taxable income will increase by $100.
This is not quite correct.
Lets assume the interest rate is the same ( it never will be ) for arguments sake.
50 Grand at 6.4 % for one year gives you $3200 + if it is compounded daily and paid regularly
With the money In a savings account, you end up with say $2240 post tax, AND you have to pay $3200 more on your loan interest than the other scenario.
2240 – 3200 = You spend $960….yes you can claim the $3200 against the IP taxable earnings, but the facts are, savings interest rates are lower than mortgage, so you will always end up with less money if you left it in the savings account,than if it were in the higher interest rate account.
You should always keep your money in which ever offset account has the higher interest rate charged against it, and if you hold a mortgage in the place you live, it’s better to put the offset against that house if you are living in it, as you can claim more interest charged against tax for the IP.
If you did it the other way around ( money in offsett against IP ) , you would loose the ability to claim the tax deduction on the account without the 50 K ( own house )
Interest only with an offset account Vs P + I makes basically no difference, I have a $4100 interest bill per month for my IP interest only, when I change to P + I, It changes to $4300, and means it will be paid off in 30 years.
With the P + I you are slowly forced to pay it off….. with Interest only you have more cash available…. normally a good thing, and allows you to invest more, but we are normally talking only a minute amount more, like 200, maybe 100 a month,,,, certainly not make or break for most pple.
It is pretty straight forward.
If you put the 50 Grand in an offset account, you will earn more money, than if you leave it in the savings account, as you will save 100% of the interest in the offset account, and only save the post tax ammount of interest from a savings account AND the interest rate in the savings account is worse than the offset.
The only time it would ever make sense to leave the money in a savings account, is if the interest rate in the savings account was higher than the interest rate of the loan AND your income is below the tax free threshold so that you are not being taxed on the savings interest …… It will Never happen!
( If it did work , you would be getting paid money from the banks, the more loans you got out, as long as they stayed below the tax free threshold )
or
use this formula if you are above the tax free threshold.
Your savings account interest rate would have to be higher than the mortgage rate by a factor of your top tax bracket just to break even :
savings rate = 6.4 % + ( 0.3 * 6.4 ) = 8.32 % just to break even, that is if your top tax bracket is 30% ( 0.3 ) in the formula
Ie – it will never happenI already have a duplex that is in a low capital growth area, easy to rent + a townhouse and a Unit in high growth area’s, both of which are + cash flow ….. was thinking that holiday rental would be a way to justify building in a more expensive suburb on the ocean vacant block, with high capital growth? + rent while it’s held or b4 it’s moved into?
Best place to start it – decide how much you can afford, then you will have a “cap” on prices which will discount some areas & make the decision easy….
Just don’t buy in Perth as it’s bonkers …. is my advice
Cheers…. was considering that too, but even with twice the rent…… you could basically have a 50% vacancy rate, and if not….. you’d be rolling in it?
Agree with Terryw, the first 6 years of absence, it is still your PPOR, as long as you have no other PPOR claimed. Get a house valuation done at the 6 year mark, and you will only pay CGT on the difference between this and the sale price…. So really there is no benefit in selling before the 6 year mark as you get the same benifit but make more money if can afford to sell later.
Thanks for the comments
I see, i’m not sure on that one…..
Good to get some ideas out there,
sbhjain wrote:Hello Da
Im in Perth myself (cannington) and in the process of buying my first IP around 500K mark.
I personally believe prices in Perth are 10-15% higher than what they should be. But in saying that, i dont think the prices are coming down, houses take a little bit longer to sell .Cheers
SaurabhThat is my point…. It looks as if guys bought too high, the market is still too high, but the sellers won’t sell at market price, but they can afford not to sell….. I can’t see how that, would give growth.
I just payed 330 for a 1 bed unit that gives 450 a week rent in NSW.
450-500 a week for a house in perth, i would guess 500+ cost price, which is a bad ratio in my books
If you take a look at a suburb, like Karawara, which is nothing special….. house prices have gone up 340 % within 10 years. Can you tell me anyone who you know who has had wages go up 340% in 10 years?
Thank you for your view – that makes sense of the differing auction clearance results in Perth.
but, I still have some concerns maybe you can also voice your opinion onThe issue of affordability – the average wage x 6 = the median house price
Having a look at these couple of graphs also…
http://reiwa.com.au/Research/Pages/Perth-quarterly-market-charts.aspx
http://reiwa.com.au/Research/Pages/Perth-house-price-chart.aspx
Both indicate to me, that the median should be down around 400 , and because it is not, you can see that the volume of sales is continually declining…. since it ran up in 2006????????????This gives me the impression that a lot of people have bumped their price up in the 2006 – 2009 period especially, way, way above where they should have been, but have been able to hold the properties and appear to have no need to sell off by lowering the price to market demand??, so as you said, more people are renting and aren’t able or interested in purchasing?
I would have thought looking at the graph, that if the prices hold steady, it will take until 2014 – 2015 for the market to catch up and be able to afford those types of houses….. or people will slowly reduce their prices as they had started doing in the more $$$ suburbs.
I just don’t think I can see the growth starting up at 10% in Perth next year, which to me, would say it’s not a good time to buy. The rent ratio is also terrible.
some snippets I have read
“Mr Lenzo and Australian Property Monitors senior economist Andrew Wilson both believe there is potential for the market to climb out of the stalemate from mid-next year but were cautious to predict bullish growth by 2014.
“Given the fact that the Perth property market has really been in decline for the last three to four years we predict an upside but our figures show that the Perth property market is still very flat and there’s no definitive signs of recovery or stabilisation,” Dr Wilson saRead more: http://www.watoday.com.au/wa-news/wa-property-experts-slam-19-increase-forecast-20110627-1gmzx.html#ixzz1n5wgxKH8 “
I would say the duplex would be around $400 – $450,000, but it really depends on how big it is, and the inclusions aswell, rather than how many rooms etc.
I’ve just done a 3 bed, 2 bath, double gge, alfresco back area with double sliding doors and that was around 450K
You need to pick a builder and get some quotes really before you can do the maths, one builder was quoting me over 100,000 for less of a house than another one. It pays to shop around, and I would look at the smaller builders in the poor”er” areas also. They normally have the best prices and the best tradies.
Can you fit a granny flat out the back?
May be better off putting the granny flat there first, then build the house?
Thanks, by the look of it, I would be building a 1B type building, which looks very similar so far to the normal residential rules ( under 12 ppl )
Is there anywhere you can view the building Code of Australia online ?
