What is the benefit of an interest only loan?

Thanks Richard, I appreciate your explanation.  JD.

First time poster and user, and this topic is real interesting to me.

Richard, your rationale is excellent….and agree with the IO way to go…however have this question.

What your saying is For EG, I take out a $300K IO loan on a OO security with value, lets just say $350K….has an offset attached to it.

In 3 years i decide to move out to another OO, and keep my first house to use as an INV property.
i have made additional repayments in the 3 years and lets say my balance is now $250K, because i have $50K in my offset account.

Are you saying that if I use that $50K in the offset to help pay for my new OO property, the balance on my first property which is now going to be used as a INV, will be back to $300K……..and hence because the balance is now $300K, it is 100% tax deductible?

i hope that makes sense

cheers

Hi Rudiga

Welcome to the forum and I hope you enjoy your time with us.

Hopefully i can make things a little clearer for you and you will understand the benefits of an offset account.

What your saying is For EG, I take out a $300K IO loan on a OO security with value, lets just say $350K….has an offset attached to it. One of the benefits with the offset account is that the loans are kept separate so you will owe the lender $300K but have $50K sitting in your savings account and only have been charged interest on the net difference of $250K.

In 3 years i decide to move out to another OO, and keep my first house to use as an INV property.
i have made additional repayments in the 3 years and lets say my balance is now $250K, because i have $50K in my offset account.

Are you saying that if I use that $50K in the offset to help pay for my new OO property, the balance on my first property which is now going to be used as a INV, will be back to $300K……..and hence because the balance is now $300K, it is 100% tax deductible?

Yes this is exactly right. If you were to make a capital reduction on the loan and then redraw the $50K in advance payments the interest would not be deductible. Because the 2 accounts are separate your investment loan balance is now back to $300K and the $50K is an on call and can be used as the new deposit> You could always cross collateralise the 2 securities (not my prefered option) borrow a 100% and attach the new offset account to the PPOR in case you move again in a few years time.

The essence is the structure and not many mortgage brokers and even less bank employees have any idea of how to structure a loan correctly to maximise your tax benefits.

I hope this make sense but feel free to contact me if you need further clarification.

LOCs are completely different to IO plus offset as there is only one account. Any deposit in the LOC will be a repayment and any withdraw will be new borrowings. So if you have your pay paid into a LOC that is deductible and then take it out again for expenses then you will be rapidly decreasing the deductible balance. You could end up with a loan similar to the original amount – but without the ability to claim any of the interest.

A LOC should only be used to access equity and for investment purposes – eg deposits on further properties, paying other rental property expenses etc.

And i am sure if we were in the US of A this link would be relevant but as the Tax and Mortgage structure in Australia is totally different most of the points made are irrelevant and misleading.