Hi there,
First time home buyer here looking for answers to some of the benefits of an offset account over a line of credit.I’m looking at buying a unit with my wife and we are both on a reasonable income which should allow us to pay it off in about 8 years. So we want to bring down the amount of interest payable on the loan as quickly as possible to reduce our interest payable.
However we also are looking to establish a portfolio of properties with a view of one day buying that all expensive house. At present we intend on living in the unit for about 5 years, saving and then look to purchasing a home to settle down into.
Now I’ve been thinking about a 100% offset account loan (say with interest only repayments for 10 years, total loan span of 20) and basically what I would be intending on doing is paying all our savings into the offset account to reduce our interest payable. In 5 years time say we have paid off $300,000 of the $400,000 (into the offset account) on the unit and now buy a house for $500,000.
Can I now withdraw the 300,000 from the unit’s offset account, take out a new loan for the house, deposit it in there (so I now have the unit loan with effectively nothing in it, and a home loan for only $200,000) and now rent out the unit, and claim a tax deduction for the full interest on the $400,000 for the unit?
i.e. Ive basically transferred all my money from the unit which will now be income producing to my home (which will be for private use) to maximize my tax benefits?
My wife seems stuck on the idea of a Line-Of-Credit, but I’m not sure you can do the same thing, i.e. suck the money from the line of credit out of the unit and put it into the loan for the house?
Sorry for this being such a long email but I’m new to the whole property investment thing and I only came up with the idea yesterday morning and cant find any info on this anywhere.
Thanks!!!!
NewEntry.NE
It is amazing how many times we get asked the same question from clients who want to puchase a PPOR only want to live there for a set period of years and then want to move elsewhere whilst retaining their current property.
The way you would structure you loan is exactly as you have suggested an interest only loan with a 100% offset account attached to it. Pour all of your incomes into the offset account and the amount of interest being charged on the home loan reduces.
Then down the track when you decide to move you merely link the offset account to the new home loan and the entire amount of interest charged on the initial PPOR becomes fully tax deductible.
One issue is that you are usually limited to 90/95% LVR at a decent rate of interest so this means when you move out and want to claim the tax deduction you can only claim against the loan amount.
Another way is of course to fund 100% of the original purchase price and get the Bank to take a term deposit account as security meaning that when you move out you can now claim 100% of the loan amount and remove the term deposit as security.
If however you have paid down your home loan and decide to rent it out all is not lost as there ways to ensure that you can still keep the property and claim 100% of the value of the security as a tax deduction.
This is probably a posting in its own right.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
Looking for life cover – We Guarantee to beat any quote you have in writing.Richard Taylor | Australia's leading private lender
I agree that the 100% offset account is the best option. Sounds like you know what you are doing.
If you were to use a LOC it would not work the same way.
When you pay money into a LOC it is considered a repayment. And when you take money out it is considered new borrowings. So if you were to pay down your LOC to nil, and then redraw the money to pay for the new home to live in, then it would not deductible because the funds were borrowed to buy a home to live in, or funds were borrowed to pay down a loan on the home you are living in. The ATO looks at the purpose that the funds were used to determine deductibility.
Terryw
Discover Home Loans
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Send an email to get my newsletter.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 is spot on. I would use the offset before a LOC for the reasons he outlined.
Simply – an offset gives you maximum flexibility whilst keeping costs down.
Cheers,
Simon Macks
Residential and Commercial 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.
Thanks for your advice and help everyone, I saw the bank manager today and am sorting out the loan.
Cheers,
NEGood talked. Easy and precise. Thanks guys
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