Just wanting to know what others would do in my situation – any comments or thoughts welcome!
I'm 21 yrs old, still living at home (no board) and no other personal debts. I bought a cheap investment ($120k) end of last year through a private mortgage of family member. It's negatively geared at the moment and only costing me $100/month to keep. At the end of each year I was planning to pay a lump sum (between $15k-20k) onto the mortgage to pay it off ASAP then look to buy my own home.
I know that it's best to pay off non-tax deductible debts first but seeing as I don't have any other debt and wanting to buy my own home in 3-4 years, would it be better to save that lump sum and use towards deposit for PPOR to pay that off sooner?
Hopefully that makes some sense! And would love to know what others would do
Hi Kali
I wouldn't pay off your IP debt if you're planning on buying a PPOR in the future.
Instead, park money in your IP offset account now – and then move these funds onto your PPOR loan when you purchase it.
That way, you're bolstering your tax deductible debt back up whilst lowering your non deductible PPOR debt.
This article I wrote for Australian Property Investor explains the concept in more detail.
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]
Hi Kali
No worries at all – I'm glad you found it useful
Yep, ideally the loan should be set up as interest only (do you don't pay off any of the principle) with an offset account linked to it. Instead of paying down the principle each repayment – you simply place that money into your offset. The more money you have in the offset, the less interest you will pay.
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]
Thankyou very much for your comment Jamie!
I don't know much about offset accounts but your article was very informative! I will definitely do some research on this.
Would this mean I would only paying back the interest on my mortgage (I currently have a Principle and Interest Mortgage)? Or does the offset account have no impact on this?
Also, it is a private mortgage – where it has nothing to do with the banks, am I still able to take advantage of an offset account?
Sorry- very new to all of this!
Sorry one more thing – It is a private mortgage where I am paying repayments straight to family members account (no banks involved) is this still possible?
Thanks again for your comments!
That's right – forgot about that little detail.
An offset account will only be provided by a normal lender.
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]
Hi Kali,
Without knowing all of the details it may be to your long term benefit to look at shifting your loan across to a bank.
Grab yourself a decent broker – Jamie has already given you a lot of good advice so give him a call – and explore the plusses and minusses of moving over to a bank.
It may be a case of one step backwards to make many forward.
Hi Kali
As has already been stated you would certainly better off with a interest only loan linked to an offset account if you are intending to save for a PPOR.
On the basis that you can qualify for a standard residential loan and subject to the security value of the property you might be better off to look at refinancing the loan to a standard
residential lender and setting yourself up ready to go again when you need to.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Kali14 wrote:Just wanting to know what others would do in my situation – any comments or thoughts welcome!I'm 21 yrs old, still living at home (no board) and no other personal debts. I bought a cheap investment ($120k) end of last year through a private mortgage of family member. It's negatively geared at the moment and only costing me $100/month to keep. At the end of each year I was planning to pay a lump sum (between $15k-20k) onto the mortgage to pay it off ASAP then look to buy my own home.
I know that it's best to pay off non-tax deductible debts first but seeing as I don't have any other debt and wanting to buy my own home in 3-4 years, would it be better to save that lump sum and use towards deposit for PPOR to pay that off sooner?
Hopefully that makes some sense! And would love to know what others would do
2 possible ways to achieve something similar.
1. Refiannce it with a commercial lender
2. Set up a discretionary trust. Gift the trust money as you go along, the trust then lends you money and you pay out the loan as you go along. The end result will be that the private loan is paid off and the trust has the loan. The terms of the trust will be such that you have an interest free loan.The trust can take a mortgage over the property too.
Benefits
1. Asset protection
2. Home paid off and no itnerest payable, and
3. If you need the money for private expenses the loan could be refinanced with a commercial lender and the interest should be deductible as you have just refinanced an investment loan.You can then use the cash for private expenses by controling the trustee position. This will be good if you buy a PPOR in the future as it will save you heaps of tax and the PPOR can be mortgaged by the trust too!
Make sure you get legal and tax advice before attempting this at home! complex with many issues
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 must be logged in to reply to this topic. If you don't have an account, you can register here.
