To invest or pay down debt?

Hi Mat,

You sound like you two are in good shape – sort of.   Having the rentals’ mortgages fully offset sounds like a good position to be in.  On the flip side, that sounds like a lot of lazy equity.   Now, so you know, I am NOT any kind of professional adviser – I’m just a bloke with an opinion or two to share, so do take the time to test any of the following with your favourite professional adviser.

1.  With the mortgages offset, wouldn’t that mean that you can’t claim any interest on these two mortgages?  And, as they are rentals, normally the expenses from a rental are deductible.  Of course, you might be using a different structure that might change things (e.g. company).

2.  From your words, it sounds like your own home (the expenses of which are not deductible) is carrying a mortgage.  To me, this would be the one to owe nothing on, as interest on it is NOT deductible.

3.  Given the above two points, my earliest thought was to take the dollars in offset to pay down (or off) your own home.  BUT, you would need to check on break costs.   As I understand things, when you are breaking a Fixed Mortgage from a LOW interest rate, most lenders don’t hit you too hard as they can then lend the freed up dollars out for a higher rate.  But if your Fixed Rate was higher than the current rates, I think the break cost could be HUGE.   So check it out before doing it.

4.  Again, depending on your actual structuring, if point 3 was able to go ahead, I would think the mortgage interest from both rentals would once again be deductible after using the Offset dollars to pay down your own home.  This would (or should) help you with your year-end Tax numbers into the future.  And, if your own home was not yet fully paid off, it would be a good one to pay right down.

5.  Once paid off, your own home would be mortgage free.  At that time, if you were to take another mortgage for investment purposes, then any mortgage expenses would likely become deductible too.   Then again, having a paid-off home is a treasure in its own right, and a welcome oasis in a world becoming more and more financially fragile.

Once again, Mat – have a think on these, but DO NOT action any without checking first with your own advisers.  Laws and rules have a habit of changing from time to time and, though these worked some years back, will they work today?   Still perhaps some thoughts were useful

Benny

I think you are best investing in another rental property. As long as you can manage your payments then using more debt to acquire assets is going to build more wealth. You obviously need to ensure your numbers will still work at higher interest rates and also make sure you have reserves to manage any vacancy, maintenance or capital expenditure.

Mat-23 wrote:

2 – Our home we live in – is the property that is our business premises – seperate section of the building – so we claim the portion of that property for  tax that is used for our business – but not our living space.

This doesn’t sound good to me. I think you should get some alternative tax advice – might be too late to fix things though.

At the very least it might be worth shifting the cash in the offset to the loan on your main residence and to break this fixed period.

You could also consider investing in a different entity, a more tax effective one, and shift offset cash as an interest free loan to this entity. This will increase your deductions in your own name and shift a large chunk of income to the new entity.