Hi Everyone,
I’m really confused by some advice I just got. I have a mortgage for one investment property. It has negative cashflow but is easily sustainable with my wages.
I was talking to a friend about refinancing to get a better interest rate. They reminded me about the cost of transferring the mortgage and any special conditions which I have already read up on.
To my question, they said not to worry about the amount of interest I pay because it’s tax deductible. I thought that it was be better to pay less interest and pay a little bit more in tax? I’m confused.
Maybe there is an article someone knows of about this subject?
Cheers,
NigelYou are spot on. It doesn’t matter that you get a tax deduction. It is still money in the banks pocket not yours. Silly logic. If you donate all your money to charity you’ll get a tax deduction but you’ll be poor as well.
One point is the tax deductible debt is half the cost of non-deductible debt (if you’re on the highest tax rate) because you can offset the cost against other income.
Cheers
Stu
My friends make this comment all the time – “Don’t worry about it… it is deductible!”. It is so frustrating!!!
I always respond with the usual comment – “Why pay one dollar today to get half, if that, back tomorrow?”
They still don’t get it.
Definately look at the cost of moving your loan but it is very prudent to regularly look at your loan to determine if your loan product is still competitive and meeting your needs. Tell your friend that I said they are nuts!
I think it is important to look at your investment properties like a business. A business strives to reduce costs and increase profits. Why would you not also do this with your property. Tax concerns should be secondary to the investment process.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksThat’s the response I was after. I talked to them this morning about this and still stuck to their argument that it’s better to pay more interest to get the tax savings than to pay less interest and abit more tax with more money in my pocket. I then said what you guys said that I might as well give money to charity because that’s tax deductible as well.
I don’t know how else to explain this to my friend.
Does anyone know of some great simple material I could get my friend to read? They read the negative gearing article and thought it was great that he could get five properties. My thought is that if he positively geared the property, he’d be able to buy even more houses.
Cheers,
NigelIf you friend want to pay more interest send him my way. I can fix him up on a 10% pa interest rate. He will be able to claim a fortune!
Terryw
Discover Home Loans
North Sydney
[email protected]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
Originally posted by Terryw:If you friend want to pay more interest send him my way. I can fix him up on a 10% pa interest rate. He will be able to claim a fortune!
Terryw
Discover Home Loans
North Sydney
[email protected]Terry I’ll see you the 10% and raise you to 12….haha
Show them the following in simple terms…
Assume you are in the highest tax bracket (48.5%) and earn $100,000 per annum and all other things being equal…
Paying MORE interest:
Pay $1 in interest today.
Deduct $1 in interest tomorrow.
Your taxable income has changed from $100,000 to $99,999.
* $51,500 Net from $100,000 taxable income
* $51,499.49 Net from $99,999 taxable incomeYour return from this dollar spent is 51 cents.
Paying LESS interest:
Pay $1 less in interest today.
Receive NO deduction for the $1 of interest tomorrow.
Your taxable income has changed from $100,000 to $100,001.
* $51,500 Net from $100,000 taxable income
* $51,500.52 Net from $100,001 taxable incomeYour return from this dollar saved is 52 cents.
You are one cent better off!
NOW, if you saved interest, you would be able to use that money so add the interest on the $1 for using it for the whole year and you receive an extra 5.4 cents (assuming ING 5.4% interest rate). Take the tax off this and you are left with 2.78 cents
You are 3.78 cents better off!
If you offset this additional income against non-deductible debt, the benefits would be far greater. Also, if you are not in the highest tax bracket, the benefits would be even greater!
I hope your friend can read and understand the simple numbers presented above. Tell them to add a few zeros to my $1 example and look at the result. Also, explain to them that each NEGATIVE geared property means just that – your cashflow goes backward with each new property. You end up running out of money!
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksNice reply Mortgage Advisor!
I gave ING Direct a phone call and have offered a hansome package which will allow me to buy more properties. They are offering up to $800k @ 6.74%. Will still look into it further but it gives me some flexibility knowing that I can get financing. I’m not looking at refinancing before the financial year. I’m going to do some more shopping and more research and look at refinancing in the new financial year.
What other suggestions do you guys have for mortgage people?
I still can’t believe ING offered nearly $800k. I just want to get a few small low risk properties under my belt first.
Cheers,
NigelNigel, you will be amazed what you could borrow with other lenders. ING are not the best on serviceability but they do have some decent products.
Sit down with a mortgage broker and you may be pleasantly surprised. It beats running around to every lender. They have already done this for you.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksHi Nigel,
Be wary how you structure the refinance, a lot of lenders will xcoll your portfolio if you let them, when the time comes talk to a Mortgage Broker.The lender prepared to lend the highest amount may not necessarily be the best option,
Subject to your future plans a professional package may be the better option, cheers.Regards
Steven
Mortgage BrokerMobile Mortgage Market
Ph: 0402 483 216
[email protected]
http://www.mobilemortgagemarket.com.auPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
Hi Everyone,
Wow – This info has changed my perspective alot and given me more flexibility.
The first property I have bought is negatively geared and returns about 4.8%. I always wanted to get more property but did not think I’d be able to get more financing.
I would like my second property to be positively geared so that it offsets the first one. This means I can look into get more property after the second because I will be in a better position. That’s if everything runs smoothly and the next property gets rented quickly.
What are some names of some good mortgage brokers in Wollongong or would service this area?
Does anyone know of some good financial planners in Wollongong or should I should I head to Sydney so that I can get some advice / direction?
Cheers,
NigelI know a Financial Planner that would probably head down and see you from Sydney but in this day and age, most things can be done over the phone, internet and fax. Email me if you want the planner’s details.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksHi Nigel,
Any of the Mortgage Brokers who regularly contribute to this forum should be able to help you,
As Rob mentioned, with email phone post etc location isn’t a problem, Cheers.Regards
Steven
Mortgage BrokerMobile Mortgage Market
Ph: 0402 483 216
[email protected]
http://www.mobilemortgagemarket.com.auPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
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