- zac_moose wrote:So, in my case we will have about 180k io loan, with no offset account. so we would be better off just paying the min and then pumping any extra cash into some other avenue than paying it down?
With your example above what if the you redraw 40k for an ip or other investment (not a boat)?
Why not just get an offset?
If you invest the cash elsewhere you will be doing yourself a disfavour. You will be paying tax on the interest received for starters as well as paying the home loan down slowly meaning more interest would be payable. If you are going to invest it would be better to pay the money into the loan and then redraw so your deductible debt is decreasing. When u redraw to invest the interest on this portion would be deductible – but this would be messy to work out at tax time.Tax deductibility of interest depends on what the funds are used for. And withdrawals from are loan are new borrowings, deposits into a loan are repayments. So if you withdraw from a loan to buy an investment (eg $40,000 of shares) the interest on this money reborrowed is deductible.
But if you have one big loan you may need to aportion interest. eg. you may have a $100,000 home loan paid down to $60,000. You then buy $40,000 of shares so 40% is for investment and 60% for personal. So you could claim 40% of the interest.
Things will get complicated though as if you may another repayment into the loan then you cannot chose for it all to go towards the non-deductible part. This is because it is one loan. eg you may a further $1000 deposit = 40% of this must come off the investment loan and 60% off the house loan. This is not ideal as you are reducing deductions. You want to reduce the non-deductible first. It also gets complicated with further deposits – especially when they are odd amounts.
Ideally I would structure loans like this:
1. IO loan with 100% offset
2. LOC for any equityPay all rent, wage, famil allowances etc into the offset. Use the LOC to pay for all investment expenses.
After a while the offset will have a substantial balance. You then have to make a decision on what to do with it. I would wait until the LOC maxes out and then, depending on the circumstances, pay down the IO loan and set up another LOC for the same amount. Just using the money from the offset to invest is no good as you will not be able to claim the interest.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
Thanks for the info Terry, the loan we have set up doesnt have an offset available but will definitely look to change in the new year. We went with our current loan because it has a lower interest rate than one with an offset account.
dnh,
A couple of queries about your NAB loan just to make sure that the Partner and/or associate won't charge any fees for the changeover.
Is the loan part of a NAB Choice package? If so, no fees!
How long has the loan been in place? Generally, NAB has an early exit fee for the first 4 years, but they will generally only charge this if you are paying out the loan (not simply changing to another product.
Cheers,
YI.Thanks YI,
Yes, I'm on the Choice Package through NAB Health Business Banking…
The Loan has only been in place since the the end of March this year…do you know if this will go against me, or am I covered under the Choice Package if I change from PI& to IO ??
No certainly wont go against you and nothing to stop you switching to their IO product with 100% offset account.
Richard Taylor | Australia's leading private lender
Good to know – Thanks Richard
lol a post 6 years later
zimby wrote:lol a post 6 years laterwhat do you mean?
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
Hi Terry,
Sorry to be responding to an old post but I have 2 questions in relation to your example as below.
1. option two below is a better choice as the 50000 redraw to pay the IP deposit is tax deductible. Is this the same as using a LOC (if the PPOR has increased in value) to pay the IP deposit? If so, what do people mean by getting the LOC on a separate loan – is that a separate loan package from the PPOR one?
2. how does the below example apply if the 2nd property was an investment property purchased in a family trust?
Thanks for your opinion,
bb8
Terryw wrote:hi DarrenYou 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.
You must be logged in to reply to this topic. If you don't have an account, you can register here.
