Negative Gearing vs Paying Off FAST

Hi Gametime

I would have though the opposite. This forum definitely has a more pro cash flow positive following than negative gearing.

With your income, you’d be best served purchasing something that doesn’t cost you a lot to hold (because it will quickly reduce your ability to borrow more).

Personally, I wouldn’t use a $100k deposit on a $250k purchase. I’d look to borrow more from the bank (and keep your hard earned stored in offset for contingencies and/or future purchases). Besides, you might want to purchase a PPOR at some point – and you wouldn’t want to have dropped all of your savings into an IP.

Cheers

Jamie

Hi Gametime,

I have learned the way this nugget of truth.  you can't eat negative gearing.  A loss is a loss by any other name.  Negative gearing is the sexy translation for "losses."

There is a reason the colloquial name for money is "bread".  That you can eat.

Take care.

Angel

Hi everyone,

I'm in a similar position to GameTime except that i already have the house (with mortgage of course) and not really any cash in the bank.

My current intention is to pay down the mortgage as fast as possible so that the house reaches a point where it's positively geared. I want to do this, not so much for positive cashflow but  more for a lack of negative cashflow… ie. I don't want the house draining my cashflow every month.

I was under the impression that this was a good way to go because i'd save heaps in interest and i'd build up equity in the house which i thought i could then use to fund my next purchase…

It seems from the above replies that this isn't a good way to go but i don't really understand why ?

Re the above suggestions of holding onto the money for a future PPOR purchase …could you put the money into the investment property to save on interest for the time being and then draw down on this later to fund the PPOR?

Now that i think about it, i don't really have any idea how it actually works – leveaging off the equity in your current property to buy the next one – but i just had a general concept that this can be done … Is this incorrect?

Thanks,

Absolutely. But as advised above, do it with an offset account. Think about it – you have one investment property with a loan of $100k and decided that you were going to purchase a PPOR a year later – also worth $100k.

During this year (before purchasing your PPOR) you’re able to save $1k each week. You could pop this in your offset account and reduce the interest you pay on your IP loan. After a year, you’ve placed $52k in your offset – therefore only paying interest on $48k.

The time’s arrived for you to buy your PPOR. You take out the $52k you’ve saved in your IP offset (which increases your IP loan back up to $100k) and put it in an offset account linked to your PPOR. In this scenario, you’ve maximized your deductible debt (IP is at $100k) and minimized your non-deductible (PPOR loan is now $48k).

Hope that helps

Jamie

Hey Guys,

Firstly thanks heaps for the above, i didn't fully understand the concept of the offset account before but now it makes sense.

Regarding the above advice though, there's something else i need to throw in that will actually change everything… ( i think..)

My house is not actually an investment property, it's a PPOR…. In my mind it's an investment property…and in fact i'm renting it out to three other people but i too am living there and i claimed the FHOG to do this so for tax purposes it's a PPOR…

In this case then, it's non-deductable debt so it would make sense to pay it down as soon as possible right … ?

Then again …. i only intend to live there for the next 6 -12 months and in a few years time i'm sure i will be wanting to buy my "actual" PPOR and i suppose then the current property would be considered an investment property and could then be converted to deductable debt ???

So perhaps… offset account is still the best way to go because it will save me interest in the mean time but then can be used to offset my next "non- deductable " purchase…

I think i just answered my own question ??

Does anyone see any issues with this? Am i correct in assuming that the current PPOR (Non-deductable) can be converted into Deductable debt once i move out?

Cheers,

Jules

Yep, that’s right. Sometimes it helps just to think out aloud

Yes, that loan will become deductible once the property turns into an IP. Therefore, putting your money in the offset now (and withdrawing later) is better than paying down the principle.

Cheers

Jamie