Hi Guys,
I’m new to this forum and have spent the last few weeks trying to take in as much of this wonderful information as possible, but I’m still a little confused as to how I should setup my loan structure with accordance to my scenario.
I’m 22 years old and still live at home with my parents and intend to for another 5 years or so to help get ahead. I’m working fulltime earning 55k gross, and only have minimal expenses.
I’m very interested in purchasing an IP with no intentions of actually moving into it to live.
I have saved up 50k which I will be using as a deposit.The IP’s I’m looking at are apartments & units here in Adelaide; I’m looking around the 300k mark, so my loan will be 250k.
I plan to have the loan paid off within 10 years so I can have it making me money ASAP as well not having to pay so much interest. But this is where I’m getting a little confused about what type of Loan I should be looking at.
I’m not sure what would be better for me financially and considering tax.
1- A 'no-frills' standard home loan with low fees and a low interest rate that pays off P+I over 10 years
Or
2- An IO with a 100% offset account (IO for 5 years) (P+I for 5 years)
From what I can gather it seems financially more beneficial for me to opt for the standard home loan because of how quick I intend to pay it off, as well as the small size of the Loan. Plus these no frills home loans offer cheaper Interest rates.
All help would be very much appreciated. I know this is a different scenario from what you guys usually get on this forum, most the people here already own a home and are looking at buying their 1st IP or already own a few, so their loan structure is very different.
Thanks in advance guys, it’s very much appreciated.
Congrats on deciding to delve into property investing – and an even bigger congrats for managing to save $50k, well done!
Personally, I'd opt for the second option – IO with offset account. It will give you more flexibility in the event that your investing strategy changes and you decide you want to access the additional repayments will little hassle.
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Oops, probably should have elaborated a little further.
The IO loan with the offset can work in the same way as a P&I loan. The difference is that the loan amount is paid down as you place money in your offset account. However, these funds are easy to take back out in the future (which will cause your loan amount to go back up). Their great for people disciplined with their money – which by saving $50k you have demonstrated.
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
I would ask you to consider a few more options.
Why not move into this one briefly, obtain the FHOG and stamp duty exemptions live in it for 6 months (with boarders if necessary) and then move back home with the parents. This way you can have the property CGT free for up to 6 years, if not longer. The property could double in value within this time and CGT could eat up to 24% of the gain. Even if you never intend to sell it is worth doing as there will be a transfer eventually.
Also I suggest you do not pay the place off. If you do your cash is tied up and unable to be used tax effectively later on. Imagine if you start off with a $250,000 loan and pay this off within 10 years. You then decide you want to buy a new house to live in. Your cash is tied up, so your new house loan will be $250,000 more than it could have been. The interest on this extra $250,000 will not be deductible. that is about $17,500 pa in deductions. possibly $5,000 in missed out tax savings PER YEAR.
So I suggest you use a 100% offset account with an IO loan. Never pay 1c off the principle and be disciplined and save every cent you can into the offset until you have an amount the same as the loan balance.
This should save you the same as if you paid directly into the loan – actually it should save you more as you would normally have a small savings account separately even if paying the loan off fast. Once you have $250,000 in the offset you then have the choice of paying off the loan if you wish – or the flexibility to use this money as you deem fit. And if for example you took out $250,000 from the offset to use as a deposit on your new PPOR the interest payable on the investment would increase and this would be deductible – saving around $5,000 pa.
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
This is interesting, because it’s almost word for word my situation (live with parents, 280k house, 60k deposit, first home/ip etc). I have decided that I will be getting a loan with an offset account, but I’m planning on holding back a bit more of the deposit (about 20k) and getting a slightly larger loan, and then sinking the excess money straight into the offset account.I will have to pay a bit of LMI, but I think I’d prefer the flexibility, if I have troubles paying the h/l, or I see another investment property and need a deposit.
The only things I have to get my head around now are the differences between IO vs P&I loans, and the CGT and living in the property for 6 months etc.
Am I understanding the above post correctly: If I get an IO loan, and pay only interest, but put the extra part of the repayments into the offset account, the end repayments would be the same (obviously they would drop considerably if I put more than just the “standard” repayments into the offset)?
zeph34 wrote:If I get an IO loan, and pay only interest, but put the extra part of the repayments into the offset account, the end repayments would be the same (obviously they would drop considerably if I put more than just the "standard" repayments into the offset)?This would be correct in terms of interest payable – in Theory. You will end up with large sums of cash in your offset and what happens is that many people go out and spend it, when otherwise they wouldn:t. So you need to be disciplined or it could be worse off in the end.
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:zeph34 wrote:If I get an IO loan, and pay only interest, but put the extra part of the repayments into the offset account, the end repayments would be the same (obviously they would drop considerably if I put more than just the "standard" repayments into the offset)?This would be correct in terms of interest payable – in Theory. You will end up with large sums of cash in your offset and what happens is that many people go out and spend it, when otherwise they wouldn:t. So you need to be disciplined or it could be worse off in the end.
Thanks for the response Terry, good to know that I’m thinking along the correct paths.
Thanks for your help Terry, its really appreciated.
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