Hi I am a first time poster and need advice!
I currently have three investment properties and have been doing a bit of research on IO loans with an offset account. I am still undecided whether this is a good option for me as I have been paying P&I for a while now but I am looking at hopefully investing in ALOT more properties so need to know what the best way to do that is!
Any advice would much appreciated! I live in Tassie so good advice is pretty scarce around here! :p
Thanks
Hi Nardz
Welcome aboard
Long story short – IO on all loans with an offset against the PPOR can be a great structure.
If you're bad with money, then P&I on the PPOR with IO against all IPs might be better.
P&I on all properties is rarely a good structure.
I wrote an article on this – I've pasted it below.
Cheers
Jamie
A question we’re always asked is “should I be paying interest only or principle and interest on my loans?”
When it comes to claiming an investment loan as a deduction – only the interest portion of the loan is tax deductible. The principle portion is not. Therefore, if you have an investment loan, and you decide to pay off some of the principle each repayment, you’re effectively reducing this tax deductible debt – meaning there is less tax you can claim back.
This can be a costly mistake for those who also have non-deductible debt (which most of us do). This includes a home loan on your Principle Place of Residency (PPOR), car loans, personal loans, credit cards, etc.
If you want to pay down any debt – it is this non-deductible debt that you should try and knock on the head first. It simply doesn’t make financial sense to pay down your deductible investment debt when you also have non-deductible debt.
So what’s the ideal structure?
Generally speaking, it’s ideal to have all of your investment loans set up as interest only.
With your PPOR debt, there are two choices to consider. If you are a disciplined saver and feel that your PPOR will one day be turned into an investment property, then it's best to also set this loan up as interest only. However, it's important that an offset account is set up against this loan so you can continue to make the equivalent principle repayments regularly into the offset account. The offset account is also a very handy place for parking any spare savings.
Why is it best to have my PPOR loan as interest only if I think it’s going to become an investment property? Because this debt will become deductible in the future – so you shouldn’t reduce it now.
Instead, you can place your money into the offset account which will reduce your PPOR interest repayments whilst the funds are sitting in the account. When this property becomes an investment property in the future, you can move the funds from your offset account on to your next PPOR. This way, you've increased your tax deductible debt and reduced your non tax deductible debt.
The interest only with an offset account doesn’t work very well for someone who isn't a disciplined saver and will be tempted to simply make the minimum interest repayments.
If you're not a disciplined saver and have no desire to convert your PPOR into an investment property at some point, then it's best to have a principle and interest loan on your PPOR. Once you've paid off your PPOR loan and any other non-deductible debt, you may wish to start paying down your investment loans.
So in a nutshell, interest only for all loans with an offset account set-up against your PPOR loan can be a great overall structure – particularly if you think you might turn your PPOR into an investment property at some point. On the flipside, if you have no desire to turn your PPOR into an investment property down the track and you are not disciplined with money- then it’s best to have interest only against all investment loans and principle and interest against your PPOR.
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]
If your good at managing your money. You could achieve the same result by setting up a IO loan with a offset account as paying P&I.
ie If you paid 2000 PI on a property every month. and 1500 was the interest component and 500 was repaying the principal
you could Pay just interest only 1500 and put the other 500 by direct debit into the offset account linked with that loan.
You would pay the same amount of interest in both situations but your availability to cash in your offset x 3 properties could enable you to save for a new property sooner.
Are the properties neutral, positive or negatively geared?
thanks for your feedback!
I think I manage my money fairly well so the IO option definitely seems like a good idea.
The properties at the moment are negatively geared. My intention is to get them positively geared and to purchase a lot more of them (I'm sure a lot of people have the same goal) but I am struggling with what next step should be. I am also looking at doing a renovation and/or a development but there is so much to think about so I need to figure out a detailed plan of action!…this is the hard part! any other suggestions?? I really appreciate this advice!
nardz an interest only loan with 100% offset account will certainly improve the cash flow position of the particular property and could make the property neutral or positively geared but remember it will only be a short term aide.
A dog of a property will be a dog of a property irrespective of what the cash flow position is like.
Yes we always and try and buy below market value and certainly when buying for our clients we do.
If you are looking at improving your cash flow why not look at vendor financing options.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
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