Hi all,
My parents purchased an investment property two years ago. This property is negatively geared, my parents would like to know the best strategy to use to pay the loan faster than they are currently.
THe property details are:
purchase price: 344,000
current loan balance: 332,000
loan type: IMB budget blue home loan
loan type: P&I
interest rate: 6.75%
current redraw available: $15,000
I have read that perhaps a LOC or offset type loan would help, however if its not too much to ask a detailed example of your advice would be greatly appreciated.
Feedback would be greatly appreciated.
It is important to know the CURRENT value of the home as your LVR is very high otherwise.
If you have read the LOC and Offset discussions, you should know how they work.
Simply, you obtain a standard interest only loan. You attach an offset account to this loan. An offset account is just a normal transaction account that links to a loan.
All income is deposited into the offset account and only the interest only payments are made automatically to the actual loan account. The cash balance in the offset account should increase if you have surplus income from your investment and work income which will reduce the amount of interest payable.
How this works is that if your loan is for 300k and you have 20k sitting in the offset account, the lender will only charge interest on 280k. If you take out the 20k, the lender will charge interest on 300k again. The loan balance never actually changes.
When you get to a point where the offset account matches the loan amount, you can just transfer the cash and get rid of the loan. You need to be good with money to use this structure properly. It is also most commonly used for non-deductible debt.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksHi Joe,
As I am not a mortgage broker or profess to be experienced re: mortgage set ups by any means. I am currently using an offset account to reduce the principle on one of my investment properties without having to add any additional repayments (although that is still an option available). I’ll leave the ‘better responses’ to your particular situation to the mortgage brokers on this site to help you in finer detail to your current situation. TMA’s reply gives an example of how an offset account can benefit.
Regards,
Gatsby.“Sometimes the hardest thing to do in life is often the best thing to do.”
There is really only one way to pay off a loan quicker. And that is to pay more into the loan as quickly as possible. There are variations on this with offset accounts and LOCs etc, but having a LOC on an investment property would be a disaster taxwise.
An offset account would be a good idea. Especially if they may need access to funds later on.
Terryw
Discover Home Loans
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry, your tune regarding LOCs has changed a lot in recent months. I am impressed!!!
I don’t know I would say there is only one way to pay a loan off quicker though. Some restructuring or addition of particular features can really have an impact without the need for more money. Things like adding an offset account, as you mentioned, or changing the way you pay your bills or receive your income would certainly help. Even the ATO Form 1515 would hav a good impact.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksIt all boils down to keeping as much money in the account (loan or offset) as quick as as long as possible. This reduces the daily balance and hence interest.
My tune regarding LOCs hasn’t changed at all. I still like them!
Terryw
Discover Home Loans
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
But you used to always tell people to get them. Now you seem to be advocating offset a lot more.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksJoe,
Another quick way to repay loan is to sell it. If there has been good capital gain, you will have more capital to buy another property.
Just my novice opinion!
From FUNI’m a novice, and I’m wondering – Terry or TMA – can you pls explain why having a LOC with an investment property would be “a disaster taxwise”?
thanks,
CarlinThe worst case is where funds are drawn from the LOC for non investment use. You lose deductibility for a start. There are also issues with paying down the deductible debt at the same rate as the non deductible debt. This means that any mess cannot be tidied up easier.
I generally don’t recommend LOC for an IP either.
Cheers,
Simon Macks
Finance Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
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