- JacM wrote:Always IO loan with an offset account. Always pay the interest as required, and funnel extra money into the offset, which holds off the interest. Then you either leave the money in the offset to pay the property off one day, or pull it back out to use it as a deposit on another property.
Im a little confused, Using any loan repayment calculator, i would seem to save alot of money paying off interest+principal and forgot about the IO loan and offset account. Paying off principal + interest asap means my property turns to positive gearing much quicker which will help me afford a 2nd IP down the road?
Thanks for your help Terryw
Thanks for your help Terryw
But consider the tax consequences.
Say you had a $300,000 loan and paid it down to $200,000. $100,000 off the princple. You then go and decide you want to buy a house to live in, but you have no cash. You can take $100,000 out of redraw and use that as a deposit, but the interest on this $100,000 won't be deductible.
Whereas, if you had used a 100% offset account, the interest savins would have been the same (assuming you saved the extra in the offset and didn't spend it). Your loan would still be $300,000 and you would have $100,000 cash in the offset – meaning you only pay interest on $200,000. You then take out your $100,000 and use it as deposit on the new home. The effect is interest on the full $300,000 is deductible. Saving you roughly $3,000 pa in tax.
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 consider the tax consequences.
Say you had a $300,000 loan and paid it down to $200,000. $100,000 off the princple. You then go and decide you want to buy a house to live in, but you have no cash. You can take $100,000 out of redraw and use that as a deposit, but the interest on this $100,000 won't be deductible.
Whereas, if you had used a 100% offset account, the interest savins would have been the same (assuming you saved the extra in the offset and didn't spend it). Your loan would still be $300,000 and you would have $100,000 cash in the offset – meaning you only pay interest on $200,000. You then take out your $100,000 and use it as deposit on the new home. The effect is interest on the full $300,000 is deductible. Saving you roughly $3,000 pa in tax.
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
Terryw wrote:JacM – usually, but not always.Imagine he had a loan of $300,000 and $100,000 in the offset. He wanted to buy $100,000 worth of managed funds. He could:
A. use the money in the offset, or
B. he could pay down the loan and reborrow it to invest.At the moment this would not make any difference. But what would happen if he decided to move into the property and live there – say a year down the track.
If he used method A, he would be paying more tax – maybe $3,000 pa more.
Its a hard decision to make. And it is probably best to love the money in the offset as long as possible until investing.
Maybe I should clarrify. I would agree with Jac – use only IO with the offset. I just wanted to show that sometimes it may be necessary to pay down an investment loan so that you can reborrow the money.
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
Terryw wrote:JacM – usually, but not always.Imagine he had a loan of $300,000 and $100,000 in the offset. He wanted to buy $100,000 worth of managed funds. He could:
A. use the money in the offset, or
B. he could pay down the loan and reborrow it to invest.At the moment this would not make any difference. But what would happen if he decided to move into the property and live there – say a year down the track.
If he used method A, he would be paying more tax – maybe $3,000 pa more.
Its a hard decision to make. And it is probably best to love the money in the offset as long as possible until investing.
Maybe I should clarrify. I would agree with Jac – use only IO with the offset. I just wanted to show that sometimes it may be necessary to pay down an investment loan so that you can reborrow the money.
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
Terryw wrote:But consider the tax consequences.The effect is interest on the full $300,000 is deductible. Saving you roughly $3,000 pa in tax.
The saving on the overall loan itself and having it gear positive outweighs a tax saving of 3kpa though?
Terryw wrote:But consider the tax consequences.The effect is interest on the full $300,000 is deductible. Saving you roughly $3,000 pa in tax.
The saving on the overall loan itself and having it gear positive outweighs a tax saving of 3kpa though?
The savings on a 100% offset account and IO loan will be the same as a PI loan. Providing you are not tempted to spend the cash.
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
The savings on a 100% offset account and IO loan will be the same as a PI loan. Providing you are not tempted to spend the cash.
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
Terryw wrote:The savings on a 100% offset account and IO loan will be the same as a PI loan. Providing you are not tempted to spend the cash.Thanks for your help and patience, im new to all of this.
So once i use my entire savings for a deposit on an IP, each week when i get paid, i deposit as much as i can into the offset, and pay just the minimum interest repayments needed on the IO loan itself until iv completely paid off all interest. Is that how it works?
Terryw wrote:The savings on a 100% offset account and IO loan will be the same as a PI loan. Providing you are not tempted to spend the cash.Thanks for your help and patience, im new to all of this.
So once i use my entire savings for a deposit on an IP, each week when i get paid, i deposit as much as i can into the offset, and pay just the minimum interest repayments needed on the IO loan itself until iv completely paid off all interest. Is that how it works?
You should get all income and rents placed into the offset account and this will save you interest. the quicker and longer the money stays in your account the more interest you save.
The offset works by reducing the amount of the loan you pay interest on.
eg. If you had a $100,000 loan and $90,000 in the offset, you only pay interest on $90,000.This works out the same as if you had paid the $10,000 off the loan – same in terms of interest, different in terms of tax.
If you have an interest only loan, then you will not be decreasing the principle. This doesn't matter though as in the end you will have an increasingly large offset account and could pay into the loan at any time – you just don't to keep your tax options open longer.
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
You should get all income and rents placed into the offset account and this will save you interest. the quicker and longer the money stays in your account the more interest you save.
The offset works by reducing the amount of the loan you pay interest on.
eg. If you had a $100,000 loan and $90,000 in the offset, you only pay interest on $90,000.This works out the same as if you had paid the $10,000 off the loan – same in terms of interest, different in terms of tax.
If you have an interest only loan, then you will not be decreasing the principle. This doesn't matter though as in the end you will have an increasingly large offset account and could pay into the loan at any time – you just don't to keep your tax options open longer.
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 Terryw, that makes everything so much more clear. i really appreciate you taking the time to help me understand. Many thanks.
Thanks Terryw, that makes everything so much more clear. i really appreciate you taking the time to help me understand. Many thanks.
OK Terry seems to have covered the finance side.
A $380K property will be pushing it. I prefer to borrow 80% as I don't like to have a high LVR but I'm a bit more conservative than others. Too old to risk losing everything.
I like to buy lower end properties as the yields are better thus costing less out of your pocket. Buy something you can add some equity to and usually raise the rent at the same time.
eg a property in the low to mid $200's will rent for $300pw, more sometimes. A property for $380 will likely rent for $350-400pw (in my research in Sydney) so cost a bit out of pocket.
It's great that you are starting to educate yourself but there is a LOT more to learn. I would take a step back, read some books. There are loads of them at the library. That way you can learn what strategy may suit you. Everyone has different ways of buying property. There is no right or wrong way. It depends where you are coming from and what your end goal is. Some people love off the plan, others hate it. Some people would never buy units.
I buy houses by Paul Do covers different strategies even though I find him a bit negative (says you can't find CF+ houses etc).
OK Terry seems to have covered the finance side.
A $380K property will be pushing it. I prefer to borrow 80% as I don't like to have a high LVR but I'm a bit more conservative than others. Too old to risk losing everything.
I like to buy lower end properties as the yields are better thus costing less out of your pocket. Buy something you can add some equity to and usually raise the rent at the same time.
eg a property in the low to mid $200's will rent for $300pw, more sometimes. A property for $380 will likely rent for $350-400pw (in my research in Sydney) so cost a bit out of pocket.
It's great that you are starting to educate yourself but there is a LOT more to learn. I would take a step back, read some books. There are loads of them at the library. That way you can learn what strategy may suit you. Everyone has different ways of buying property. There is no right or wrong way. It depends where you are coming from and what your end goal is. Some people love off the plan, others hate it. Some people would never buy units.
I buy houses by Paul Do covers different strategies even though I find him a bit negative (says you can't find CF+ houses etc).
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