Question relates to changing to IO loan on investment property. Please explain the benefits to us in the below scenario.
We've just moved out of our unit (PPOR) where we were paying $2200 per month.
Now our outgoings are $2200 (mortgage P&I), $1320 the rent we now pay the unit we have leased for a total expense of $3520 per month.
Our income on the IP is $1520 per month in rent received.
Now expenses minus income gives us $2000 per month (saving $200)
My question is this. With 290k remaining on a 350k property should we continue the loan as P&I or change it to Interest only where we will save a further $200 per month? I know that the principal isn't deductable on the IP but how do you pay it down? Capital Gain? And also, will the savings gained by our change to IO increase our borrowing power as a result of an increase in our cash flow?
Thanks in advance, Jas and LivLoan balance divided by Market value of PPOR * 100 (LVR) one ratio used by bank to access how much you can borrow.
Information missing
Marginal tax rate, age of building may be able to claim building write down
Interest charged on loan, Council Rates , Water rates, insurance, repairs – Claimable deductions
nett property income = rent – interest – council rates – water rates – insurance – repairs
If this is negative it comes off taxable income from wage thus marginal tax rate determines tax back at end of financial yearWhat is your main goal.
To get a tax deduction or pay down the loan.
If you pay off an extra $200 a month you save paying compounded interest over the long term.
You may wish to have an offset account set up to place the $200 a month into a savings account to either pay off the loan later on or use as a deposit for another property. Capital gain will not pay down the loan if you wish to keep the property and avoid capital gains tax when selling.
Say your tax rate is 40% as an example. you lose say $10,000 a year as a loss you can only claim back $4000 so you lose $6000 a year . You need a capital growth of about $6000 to cover this loss each year plus probably 12% on top of this to cover the capital gains tax.Over the short term it seems you are getting no where but rents go up over time and interest rates may change. Where capital gain may be useful is that you can get your property revalued and borrow against it to get money for the deposit for the next property but this approach relies on achieving capital growth. If no growth then you end up with lots of debt.
recommend you read books on property investing.The main thing is to never pay off an investment loan until you have your PPOR loan fully paid off – and even then it is probably still a good idea to pay IO.
Once you pay money into a loan it is trapped. Say you paid the loan down to zero, then you wanted to buy a new PPOR – you would have to borrow the lot and the interest would not be deductible.
Instead of paying the IP loan down why not pay the money in a 100% offset account, This will save you the same interest and make your money available without reducing loans. Will save you a heap of tax later.
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
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