INTEREST ONLY OR P&i

You are correct, but what about the tax implications?

You would be better to pay down the home loan first as the interest is not deductible. If you pay the investment down you will end up paying more tax, while the home loan will remain high with you paying more interest there.

In that case it is a bit different.

Paying down debt is good, but once you pay into a loan your money cannot be taken out again (eg redraw) without tax consequences.

So I would suggest you set up a 100% offset account on at least one loan and continue to pay IO and then save all the extra money in the offset. You will continue to save the same amount of interest as if you paid into the loan, but your cash will be available later on.

an example may explain it better.

eg. you have a loan of $100,000 with $50,000 cash windfall. You could pay the $50,000 into the loan and reduce the balance to $50,000. Or you could put $50,000 in the offset and have a $100,000 loan. Either way you will be paying interest on only $50,000.
say you then decide to buy a place to live in. You need $50,000 deposit. You could withdraw it from your loan. But the interest on this $50,000 would not be deductible. You would have a $100,000 loan with only $50,000 being deductible.

But if you had used the offset you would just withdraw if from the offset account. The loan would still be $100,000 but interest would be charge on the full $100,000 now. But in this case the full interest on the $100,000 is deductible.

can you see the difference?

yes, better in an offset for tax reasons. Interest would be the same whether money goes into loan or offset.

hi Darren

You can do it on a PPOR. But you need to be careful there.

Best with an eg again.

Say your PPOR loan was for $100,000 and you had $50,000 in the offset. You would have 2 choices if buying an IP

1. use the $50,000 in the offset as a deposit.
or
2. pay the $50,000 into the PPOR and then reborrow it for the deposit for the IP.

2 is much better as the interest on the $50,000 will be deductible. ie your home loan is now $50,000 and  you have reborrowed $50,000 for investment.

With option 1 your home loan would still be $100,000 and you would be paying interest on the full $100,000 because the deposit for the IP wasn't borrowed.

So why use an IO loan with offset for a PPOR?
You would be no worse off in terms of interest by using the offset and IO, but you have the flexibility to pay the loan down if you need to.

After a few years you may want to upgrade to a bigger PPOR and keep the existing one as an IP. If you had paid down the loan all your money may still be available as a redraw, but the interest on this money when taken out would not be deductible. But if you have used the offset option the loan won't be going down so all the interest on the full amount would be deductible if you converted the house to an IP.

Does this make sense?

With an IO loan you can also pay extra off it at any stage. So you could even keep the loan IO and pay the equivalent to PI if you wished to. if you were going thru a tight period you could reduce the repayments (if you had a PI loan you would need to reapply to do this). The repayments are lower than a PI loan so you can afford more investments.

Hi

You will have to apply for a variation to change to IO and they may charge you a fee, depending on the product you are currently on et.c

Good info terry, I am in the same position as dnh, I have just bought a place for 235, and will have about 180 loan, going to make it io. The loan wont have offset, only redraw, however it sounds like this doesn't matter and is in fact beneficial.
Can you give a broad overview of when redraw is better and when offset is better? Does it change depending on the size of the loan?

Terry – I'm borrowing another $50k from the bank next week (ontop of my current $200k loan):
 
$35k for the remaining sub-division work
$15k to fix up the external of my existing home (Paint, Repairs and Front Verandah).  This will help with street appeal come time to sell back block/house.

I spoke with my Bank Managers Associate today to discussed changing my current P&I over to IO – she stated it shouldnt be a problem…my plan is also to get the additional $50k as IO with a linked offset account (as we've discussed in this post)…

With this in mind I have 2 questions:

1 – Are there any Tax / Deduction implications with having 2 separate IO accounts that I should be aware of ??  (all I can see are the positives…)
2 – What's the banks general position on IO loans, is there something people can do that commonly helps persuade the bank to allow IO loans ?? 

I've convinced the Associate the my current PPOR is an IP (which it is) as I've heard IO Loans are generally only for IP purchases…

Your thoughts ??

Cheers,

Darren

Thanks 

Zac Yes just pay in the minimum amount.

If the redrawn funds are for investment then that is fine but i personally would still like to see a split loan account to keep things nice and clean for accounting purposes.