Ive read lots on this topic on the forums but couldnt ever really get my head around it but found a couple sites that help explain it pretty welll + the whole control v ownership idea.
Cheers
http://propertybyme.com/7/not-paying-off-mortgage-better-investing/
http://investingbyme.com/5/key-to-riches-control-vs-ownership/The best explanation is this:
If you pay PI on an investment loan while you still have non-deductible debt, then you are throwing money away by wasting tax savings.
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
Hi grantos_champos,
in a nutshell, an IO loan gives you more flexibility. You can still make extra payments and pay down your principal, but you don't have to, like you do on a PI loan.
i have a quick question regarding that sandra,
does this mean i can set my ip mortgages to IO, and each week make a manual payment that will vary depending how much i want to throw at it and not be penalised, but if i choose not to dont have to? i assume avid investors prefer to do it this way or something similar?
thank you for posting
BenBen and Mina wrote:i have a quick question regarding that sandra,does this mean i can set my ip mortgages to IO, and each week make a manual payment that will vary depending how much i want to throw at it and not be penalised, but if i choose not to dont have to? i assume avid investors prefer to do it this way or something similar?
thank you for posting
BenAs long as you are covering the interest each month this would be possible. A better way would be to just pay the interest and to keep any excess in the offset account.
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
Hi Ben + Mina,
in principle, yes that is how it would work, but you would have to check with your bank whether they charge any fees for this or if there is a minimum re-payment amount, although that is unlikely. You would, however, incur costs for changing your existing PI loan to IO, so it is better to do this when you set up your mortgage in the first place.
Let me explain further about the use of an IO loan and putting money in an offset account.
Firstly, if you have non deductible debt you would be better off paying this down first rather than paying extra into an investment loan or into an offset on an investment loan. This is because personal debt is non deductible. Every cent paid into an investment loan means less deductions which means more tax so its best to reduce non deductible interest rather than paying more tax.
Next, even if you have no personal debt I think it is generally not a good idea to use a PI loan or to pay extra on an investment. By using a PI loan you are reducing the loan balance and locking your money away. These extra funds paid are trapped in the loan – from a tax perspective. You may be able to access the funds via redraw but there will be adverse tax consequences.
The good news is that you can still save the same amount of interest by placing excess funds in the offset account instead of the loan.
eg. $100,000 loan and you come into $50,000 cash. You have 2 options
A. pay down the loan to $50,000. Good news you think as you only have a loan of $50,000 and you only pay interest on this. But you suddenly need the $50,000 as you plan on upgrading to a bigger home or need to buy a new car etc. So you redraw the $50,000.
You have a loan of $100,000 as before the deposit, but now only interest on $50,000 is deductible because the 2nd $50,000 redrawn is to be used as deposit on a personal item. Interest on personal borrowings is not deductible.
B. Now say you had a IO loan with a 100% offset account. You retain the loan balance of $100,000 and place the $50,000 in the offset account. Now you only pay interest on $50,000, so you save the same amount as in A (assuming rates etc are the same).
When you want to use the money you just take it out of the offset and use it. There are no tax consequences as your loan hasn't moved. The interest payable will go up when the money is withdrawn and all the interest should be deductible as it was before.
Interest on $50,000 would be around $3,500 pa. Tax saved on this may be around $1000 pa give or take depending on yoru income. so it is a fairly serious issue -especially when you consider the compounding effect over the life of a loan. You could be using this money to save non-deductible interest on your home loan.
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
Thanks sandra and Terry for providing some insight, most certainly an IO mortgage with an offset account will be what suits me best in my current situation (see thread https://www.propertyinvesting.com/forums/property-investing/help-needed/4333943 )
so thank you for sharing that info
Ben
Terry,
Lets say you have a dear old grandmother with a spare 50k that she wouldnt mind leaving in your bank. Could you potentially put that in your offset account or are there some other tax implications of 50k suddenly appearing in your bank account?
Also lets say you put 95k in the offset account would you really only be paying interest on 5k? or is that just not a logical thing to do in the first place?
Grant
grantos_champos wrote:Terry,Lets say you have a dear old grandmother with a spare 50k that she wouldnt mind leaving in your bank. Could you potentially put that in your offset account or are there some other tax implications of 50k suddenly appearing in your bank account?
Also lets say you put 95k in the offset account would you really only be paying interest on 5k? or is that just not a logical thing to do in the first place?
Grant
Things are not always straight forward.
You could put your grandmother's $50k into your offset account – but there would be implications for her pension. She may still be assessed as receiving interest on the money even though she hasn't got it anymore. And if your property is an investment your tax deductions will go down, so you may pay more tax. Overall it could work out worse off.
if you did have a $100,000 loan and put $95,000 into an offset you would be paying interest on only $5,000. Nothing wrong with this in general, but whether you should do it or put the money elsewhere will depend on the situation.
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
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