I have a negatively geared property. Units in complex have not sold for past three years, so no chance to sell. Should I pay down the loan with my own money which gets me no tax deduction but will get me to being positively geared more quickly. Or should I put that money into an account and earn interests and continue to wait for increase in property value. Have had property 13 years. It has increased by about $20,000 and loan is for $50,000 less the current market value, if there were buyers.
Do the calculations, see what works for you. Different people have different goals.
For me, aim of the game is income, so I would reduce the debt so it start to be positive and sink income back in to it accelerating repayment.
Some 'try to stay' as negative geared to reduce TAX on income. It's a choice they make, so strategy is different.
Others have 'better' places to invest cash, so they let property to sit there and invest hard cash in more profitable ventures or other IP's.
If you have some cash to throw at your loan then throw it into an offset account as this will save you interest on your loan and provide you with flexibility of your funds moving forward.
If you pay down the loan and then need to claw back the money for medical emergency (as an example) then the redraw component is not deductible. If the same situation arose and you grabbed the money out of your offset there is no impact on deductibility.
Money in an offset account saving interest is a bigger windfall than the same sum of money in an interest bearing account which is taxed.
From memory I would need to reduce the loan by about 50,000 to get to cash pos, as the property is a unit with high body corporate fees etc.so this would take me about 5 years. For me it's not about tax breaks I want to get to an income producing assessor in about 10 years if possible when I retire.
Are you saying that if I put money into an offset, I could redraw it later say to buy shares or even personal expenses?
Bugaloo; I've only just started in the past two months to investigate the property game, so forgive my explanation.
1. They are saying to have an offset account, it's like a redraw, but just an account attached to your loan.
– If you owe 200k on your loan, you pay interest on 200k
– If you had 50k in 'offset' account, you havn't paid any of your loan back, but only pay interest on 150k
– If you have a redraw facility, you're paying off the loan principal, the comment was, you can't then take this money to use on personal expenses and still have a deductible loan – because your personal expenses don't produce income for you.
– Whereas, the offset account is just money sitting in an account, your principal was never changed, just the amount you paid interest on.
– As far as I can see, in the interest offset account, you're saving interest of at least 5.9% (variable rate), whereas if you put your money in an account, earning interest, you wouldn't get 5.9% and you'd be paying tax on the interest you make – so it becomes a save interest on loan verses make less interest, but get taxed on it.
Hope my basic understanding has helped it click in your head;
I would only pay down the loan if you have a main residence fully paid off. Otherwise you will be losing tax.
And then if you have have a main residence paid off I would still rather use a 100% offset to store the cash as this will save you the same amount of interest but make the cash available for non investment purposes without affecting the tax deductibility of the loan.
ie if you pay $50,000 off the loan and then need to buy a new car you may have to redraw (= borrow) from the loan and this will cause the loan to become a mixed purpose loan (part investment part personal) and it wll mean you won't be able to claim the interest on the amount redrawn – whereas the offset method could have avoided this totally.
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
If the funds come from your offset you can withdraw them and use them as you see fit without affecting the deductibility of your core loan.
If you pay down your core loan and then REDRAW funds from the surplus you do compromise deductibility.
From a flexibility point of view an offset account is far better. I would also add an offset account is much more effective then funds in a term deposit strategy like the one you are using at the moment.
Why? 'half' of the interest earned in your term deposit is lost to tax.
Thanks Derek, this is beginning to make sense to me. I had assumed money in an offset account attached to an IP loan would only be able to be used for payments related to the IP.
Thanks for that detailed response tlm1987. You have gained a lot of info in only a few months. I have had this IP for 12 years and have made heaps of mistakes, but am hopefully getting a better grip on things now. Much appreciated this makes sense and I will investigate further.
Terryw PPOR is paid off, but now the race is on to set up for retirement. However with the replies above as well as yours, I understand this will make more sense, especially as I do need to buya car in the next few years. I have an account set up to pay bills for the IP but don't know if it is an offset account (hopeless as I should know this, but it was only last year that heard about a change in a tax ruling where it said that it wasn't a good idea to pay rent off PPOR's because this could compromise tax deductions, so I set up the account to pay rent into and pay bills out off. It is also where the interest payments come from, so could be an offset. ). Thanks for the response. I will talk to my bank this week.
Hi Terry
Just wondering about the other way. I am holding money in my PPOR offset account, which is currently reducing my PPOR loan until I use it down the track as a deposit for further IPs/investments. Since this money is in my PPOR offset, I assume it is simply called 'savings' and can be used as I like
ChrisA1
Persistence is 'to keep on keeping on, no matter how hard the going may be'
ChrisA1 wrote:Hi TerryJust wondering about the other way. I am holding money in my PPOR offset account, which is currently reducing my PPOR loan until I use it down the track as a deposit for further IPs/investments. Since this money is in my PPOR offset, I assume it is simply called 'savings' and can be used as I like
It will not be a good idea to use money in an offset on your home loan for investment deposits. This is because when you take the money out your interest on the home loan increases and this will not be deductible.
Better to borrow the money out of equity. If no equity then best to pay down the home loan and then reborrow it by setting up a new loan.
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
Are you planning to purchase more properties in the future?
Regards
Shahin
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
Email Me | Phone MeResidential and Commercial Brokerage
Appreciate your comment here Terry.
Could you please explain about reborrowing by setting up a new loan.
I am aware that once I take the money out of the offset, the home loan increases. I took this as a cost of starting the IP journey until the IPs started revaluing. However thanks for the information that this money wouldn't be treated as deductible debt – I thought it would have been since the funds were only in the offset and the purpose of the money was for investment purposes?
I am not wanting my PPOR revalued again as I have had the PPOR revalued twice as I paid the loan down and each time the bank allowed me equity but shrunk my loan so I didn't have the redraw funds available, if this makes sense….
I have the feeling the bank will say …you again…. I suppose the reason why I am leaving the money in the offset is to keep my PPOR loan out of the mix going forward. I was wanting to view the funds in my offset account as 'savings' towards my IPs and keeping the funds in the offset to lower my PPOR loan in the interim.
Appreciate your comments as I feel I am going down the wrong track with my thinking….
ChrisA1
Persistence is 'to keep on keeping on, no matter how hard the going may be'
Derek, I am very conservative which is why I chose to pay my PPOR off rather than draw down funds and buy again.
My experience with property has been disappointing particularly as the usual doubling of value every ten years has not happened in my situation. But I do need to review my strategy, but want to not loose focus on the savings in the meantime, which is why I like the offset account idea for parking money.Bugaloo wrote:but now the race is on to set up for retirement.Given you have paid off your home then Terry's comment has some merit to it.
But the above is far more telling than any tweaking what you do with an offset (or not) account.
If you are now in the 'setting up for retirement' phase then it MAY be more appropriate for you to continue with an offset account and look at adding other property, or other assets, to your portfolio.
Now I don't know enough about your situation to really comment further but it may be appropriate for you to step back a little and look at the bigger picture before going much further.
Hope this helps.
Bugaloo wrote:Thanks Derek, this is beginning to make sense to me. I had assumed money in an offset account attached to an IP loan would only be able to be used for payments related to the IP.Hiya
An offset account is treated differently to a redraw account.
There's no implications with moving funds into and out of an offset account – however, there are implications if you were to "redraw" funds from the loan – that's classed as new borrowings and the purpose of the redraw will determine whether the funds are deductible.
Cheers
Jamie
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]
ChrisA1 wrote:Appreciate your comment here Terry.Could you please explain about reborrowing by setting up a new loan.
I am aware that once I take the money out of the offset, the home loan increases. I took this as a cost of starting the IP journey until the IPs started revaluing. However thanks for the information that this money wouldn't be treated as deductible debt – I thought it would have been since the funds were only in the offset and the purpose of the money was for investment purposes?
I am not wanting my PPOR revalued again as I have had the PPOR revalued twice as I paid the loan down and each time the bank allowed me equity but shrunk my loan so I didn't have the redraw funds available, if this makes sense….
I have the feeling the bank will say …you again…. I suppose the reason why I am leaving the money in the offset is to keep my PPOR loan out of the mix going forward. I was wanting to view the funds in my offset account as 'savings' towards my IPs and keeping the funds in the offset to lower my PPOR loan in the interim.
Appreciate your comments as I feel I am going down the wrong track with my thinking….
Say you had a $300,000 loan with $100,000 saved in the offset.
You would pay interest on only $200,000. At 6% = $12,000 pa approx
The offset would save you $6,000 pa in interest.Then you decide to buy a new investment property. You have 2 choices
1. Use the offset money for the deposit, or
2. Borrow the full amount1. You withdraw $100,000 from the offset.
Your loan on the main residence remains the same, but now you are paying interest on $300,000 so this will mean $18,000 pa in total. None of this will be deductible.2. You borrow $100,000 by setting up a new loan.
This means you keep your $100k in the offset saving you interest, but you borrow another $100,000 for the investment.
Therefore your main residence’s interest is still $12,000
But your new investment property’s interest is $6,000 extra because you have borrowed this money.
Your total annual tax deductions have been increased by $6000 pa by using the second method. This may mean an extra $2000 extra cash saved per year for 30 years….CompoundingTerryw | 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
Know what you mean.
I would still encourage you step back and look at the bigger picture. After all the 'bigger picture' is more important that the short term hurdle you are having trouble stepping over.
As they say in the classics 'one swallow does not make a summer'
You must be logged in to reply to this topic. If you don't have an account, you can register here.
