pay off or interest only????

Hi eilatan28 – and welcome to the forum.

May I start by saying this is why accountants worry me (a lot of them) SO many have so little an idea on how to grasp lending and loan basics, and of course their info gets acted on, and you/we pay for the advice!

Without knowing your full circumstances, and to keep it simple, here you go.
Firstly, if it IS definitely your goal to sell (and enjoy that lovely capital gain) then go for it. Unless you can use equity (which you have to borrow against and pay interest on anyway) there is no other way to lock in profit (tax free profit in this case) on property other than doing just that – selling it.

Secondly, if you were keen to hang onto it and or switch your loan to an interest only product as you mentioned, you would make sure the loan had an offset savings account with it – meaning you offset the interest charged on the balance of your home loan, with the balance in your savings account – effectively the net effect of this is like getting whatever interest rate your mortgage is at, from your savings. It is tax free, because no interest is actually paid to you by the bank, rather it is not charged on your homeloan.   If you were to put the savings into a high interest account as you were advised, you will get maybe 5-6 % if you hunt around on an on line style account, and then be taxed on that.

Hope that general information gives a simple explanation, and helps.

Cheers

Surely tell me this is not the reason he has suggested you remove the offset account it reduces our tax deductible expenses.

If so i think i would be finding myself a new Accountant, Mortgage Broker & Finance Consultant and every other hat he wears.

Next thing he will be suggesting you should look for properties that are negatively geared so you can get some Tax benefit on your loss.

The beauty of an offset account is that you can minimise the interest payment without reducing the principal. It doesn't make sense to reduce the principal (and associated deductible interest costs) on an investment property . Better to withdraw funds from the offset account for non-deductible purchases, such as deposit on a home.
Graeme Freer
Freer Property and Finance

Why would you pay it off?  Just leave the money in the offset.  You might change your might about your strategy between now and then.  If the money is in the offset, the savings on interest is the same as if you'd paid it off anyway.

Wow your accountant should be fired.  If you are making a loss, it is a LOSS.  The tax department will not give you a full refund on your loss either.  Just a portion of it.  Why would you deliberately make a loss?

Eilatan,
I am not going to defend accountants either but her advice makes little sense, in not paying down debt because it reduces the tax deduction but then investing surplus funds in an interest bearing account? Why not run the numbers and see which gives a better return to you.

Ultimately wealth is about assets less debts, so increase one while decreasing the other is what the end goal is about. The timing on which you do will depend on your end goals and your timetable. In concept I don't have a problem with reducing debt, however if you plan to build a multiple property portfolio, you need to concentrate on increasing your asset base and you need to have available cash flow and deposit to be able to borrow again. When you have built your portfolio and are comfortable, then concentrate on reducing debt.

You could use an offset account, even if it is against an investment loan, but if you have the borrowing capacity and wanted to purchase another IP, I would get the initial IP revalued and refinanced to set up a LOC and use that to fund the deposit for the second IP. Continue to channel surplus funds into your offset which is turn can be used effectively for purchases of a private nature.

In terms of CGT, as Terryw said, it has nothing to do with the loans associated to a property. It is simply the net selling costs less the costs to acquire. That is the profit. The surplus funds available is the net sales price less the loans outstanding. Two different concepts.
Good luck
Greg