Offset Account v Principal Pay Down

There is a huge difference!

Paullie has provided excellent advice above. If you're an undisciplined saver and will only make the minimum interest repayments then IO with an offset is not for you.

You're not necessarily drowning in debt if you make regular repayments into your offset and avoid withdrawing (unless it's for a good purpose).

Cheers

Jamie

If the $90k is being used for an IP it should be deductible. If it's being used for a PPOR it won't be.

If you have $90k sitting in your offset and moved it on to your next PPOR, you would have boosted your deductible debt by $90k (which is a good thing) and reduced your non-deductible debt by $90k (also a good thing).

If you have a slight inkling that your PPOR will one day become an IP, don't pay down any more principle. I wrote an article for API magazine recently on this topic – it's available here

Cheers

Jamie

Cheers

Jamie

Withdrawing from a loan = new borrowings

What determines deductibility? The purpose those funds will be used for.

So, if you redraw from a loan and then buy a private residence (PPOR) with it then the interest won't be dedutible.

Hi Louise

No worries at all. I'm glad that you find the information useful

As you said – ask the lender if converting to an IO product with an offset is a possibility. There might be a small fee involved but it's worth it.

If not, and if you used at least a 20% deposit, then it would be worth while looking to carry out an external refi. There will be some costs involved, but at least you won't be slugged with a Deferred Establishment Fee (DEF) for leaving as your loan settled after the new law passed banning DEF's.

Given that this is going to become an IP – you already know that it doesn't make sense paying down the principle and redraw is a big no no.

Cheers

Jamie

Hi wezwaz

The bank won’t ask you to close the facility.

You won’t be earning interest on the $330k but if you took it out, you’d be paying interest on your home loan.

If you have an inkling that your PPOR will become an IP at some point, I wouldn’t pay off that debt.

If faced with this scenerio you should have a word with your accountant as well.

Cheers

Jamie

yes that is the beststrategy just in case..
he only reason not to do this is if you are tempted by large sums of money
t

I agree with many of the comments on here.
It 100% does depend on the way you intend to use the property (or indeed properties) in the future.

If you are certain the PPOR you are in now; will remain a PPOR for 15-20 years, then making the loan P&I is the way to go.

But if the place is only a short-term ‘home’ (say just a couple of years; using as a stepping stone to a different property, for example), then setting it up as IO for the longevity of the loan is the best thing to do.

Just remember your ‘cake base’ (for most investors, this is usually the first property you purchased; probably as a PPOR, before drawing equity out of it to fund future IP’s). This is the property where you should either be paying P&I (if you are occupying it), or if it is rented out, you should be pushing cash into an offset account held against this property, and not others.

I made this mistake for the past two years until my accountant recently corrected me on it.
The lines then get further blurred when you move in and out of different properties. Some say you should ‘only buy IP’s for investment, and never use them at any time for PPOR purposes’. But I disagree.

I just settled my 4th property, which is to be my PPOR for the next few years at least. I have set it up as IO (along with my other three properties, even my first ‘cake base’ purchase’), but pouring all my ‘offset’ cash into an offset account against this fourth one (and not my first purchase), with the intent of making this fourth property my new ‘cake base’.

This means that future property purchases will draw from the equity in property #4, not property #1 (like I have been doing). One of the influencing reasons for this is because property #4 is actually more expensive than #1, and has greater capital growth prospects than property #1.

I blogged more about ‘cake-base’ strategy here:

http://www.propertyspectator.blogspot.com.au/2012/04/building-your-cake-base-six-year-itch.html

But after reading some comments I don’t think I got it quite right.
I’d be really interested in hearing more from those who have applied such a shifting strategy in their portfolio.

Cheers,

Wes,

If you had $300,000 cash in the bank would you be tempted to buy something you may otherwise not have bought? Many would.