Forums / Property Investing / Help Needed! / Paying Off Investment Loans

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  • Profile photo of craig123craig123
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    @craig123
    Join Date: 2012
    Post Count: 27

    Hi

    Can somebody please advise?

    I purchased a property to live in 8 years ago, 5 years ago I moved out to a rental and now rent my property out, I have also borrowed money using equity in my first property to purchase a 2nd property of which I also now rent out. I did this last year.

    Should I try to pay off both loans as quickly as possible or just pay the minimum and max my negative gearing?

    In total I owe 400K, Both properties together are worth about 600K, The rent collection does not cover loan repayments, I pay a few hundred extra a week to cover.

    thanks all, any advice much appreciated

    Craig

    Profile photo of Aaron_CAaron_C
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    @aaron_c
    Join Date: 2012
    Post Count: 65

    Put any excess cash you have into an offset account against the loans so you don’t pay down the loans but effectively reduce your interest repayments.

    Profile photo of Jamie MooreJamie Moore
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    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi Craig

    Welcome aboard.

    Do you have any non-deductable debt such as personal loans, credit cards, store cards, ect?

    If so, it’s best to knock this debt on the head first.

    Generally speaking, it’s ideal to have tax deductible IP debt set up as interest only. You only need to have one offset set up against either of the loans – park your spare cash in this.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of craig123craig123
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    @craig123
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    Post Count: 27
    Aaron_C wrote:
    Put any excess cash you have into an offset account against the loans so you don't pay down the loans but effectively reduce your interest repayments.

    Thanks Aaron, could i just wack all my money straight into the loan, and redraw if i need to? same effect right??

    Profile photo of craig123craig123
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    @craig123
    Join Date: 2012
    Post Count: 27
    Jamie M wrote:
    Hi Craig Welcome aboard. Do you have any non-deductable debt such as personal loans, credit cards, store cards, ect? If so, it's best to knock this debt on the head first. Generally speaking, it's ideal to have tax deductible IP debt set up as interest only. You only need to have one offset set up against either of the loans – park your spare cash in this. Cheers Jamie

    Thanks for the reply Jamie,

    No I have no other debts,

    at the moment i am paying off more than i am supposed to off the loans, so should i just pay the minimum and set up an offset account for either one of the loans? Whats the advantage of this?

    Thanks, Im not really up to speed with this type of stuff

    Profile photo of MenunesMenunes
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    @menunes
    Join Date: 2012
    Post Count: 28

    From what I understand by keeping funds separate is makes the split between personal and investment easier at tax time.
    If you put the money to the investment loan, then redraw it for personal use, you can’t claim that portion of the interest as a tax offset.
    If you put the cash in an offset account, you get the benefit of less interest whilst it’s there. But when you withdraw for personal use you then don’t need to worry about percentages between the 2, it it is clear what is investment funds and what is personal.

    There are a few posts through this site that explain it better than I have, but that’s my understanding…

    Profile photo of Jamie MooreJamie Moore
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    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi Craig

    When you “redraw” money – the purpose of what the funds will be used for will determine whether the redrawn amount is deductable.

    For instance, if you paid a large chunk off your loan and then redrew this amount to purchase a house to live in, the redrawn amount wouldn’t be deductable because the purpose isn’t investment related (it’s an owner occupied home). In this instance, you also risk contaminating the entire loan – meaning none will be deductable.

    If you had paid all of this cash into an offset and took it out at a later date, you wouldn’t be confronted with the same issue.

    Long story short, interest only with an offset is ideal.

    I posted this link the other day, it’s an article I wrote for Aus Property Investor magazine on this topic, hopefuly it helps http://passgo.com.au/blog/25-mortgage-broker-canberra-blog/75-interest-only-with-offset-account-structure.html

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,190

    I would recomend IO loans with no extra repayments but putting all cash into an offset account.

    Never pay down investment debt while you do not have a main residence – otherwise you would have to borrow more to buy one = bigger non deductible debt.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of craig123craig123
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    @craig123
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    thanks all, I will open an offset account, and redraw the extra money in both loans back to the offset

    Profile photo of TerrywTerryw
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    @terryw
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    hang on – you cannot just redraw money. If you do that you will end up with a mxied purpose loan.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of craig123craig123
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    @craig123
    Join Date: 2012
    Post Count: 27

    ok, so atm I am 20K in front each on both loans, so leave this as it is and just open an offset and put my other savings in that??

    any idea how much damage I have done?

    Thankyou so much for this info, I did not know.

    Craig

    Profile photo of TerrywTerryw
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    @terryw
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    Damage not so bad – you have just tied up $20k thats all. If you have no cash and need $20k, for example, you would have to borrow it and then the interest on that would be 7% pa or whatever your loan rate is = so about $1400 pa in interest. So essentially, if you were to buy a place to live in you would have $1400 pa less in tax deductions each year.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of craig123craig123
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    @craig123
    Join Date: 2012
    Post Count: 27

    Thanks Terry, when the offsets are open, what if I cease my payments till the surplus reduces? is that an option?

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,190

    Yes. But just make sure the bank won’t class it as a missed repayment and default

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of craig123craig123
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    @craig123
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    Post Count: 27

    Done, I have set up offsets, changed loans to interest only and ceased payments until suplus reduces, thanks for the info, I hope your right

    Cheers

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,190

    And did you check with the bank that stopping payments is ok?

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of craig123craig123
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    @craig123
    Join Date: 2012
    Post Count: 27

    Yes, all ok

    Thanks for you advice Terry

    Craig

    Profile photo of adzleaadzlea
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    @adzlea
    Join Date: 2012
    Post Count: 15

    Hi

    I am in a similar situation, purchased ppor 7 yrs ago moved out 2 yrs ago to rent out and moved to company house rent now pays for itself p&i and have $280 owing worth about $550 with about $90 k in offset

    . Also brought another one from equity loan of $125 k leaving about $18 in kitty for emergency. Balance of 80% loan from another fi for $355 this one neg geared and putting in a couple of hundred a week @ io

    We have no personal debts only a cc that is used to live on and balance paid every month religiously.
    Though we need $20k – 40 from offset in the near future for personal use

    Do I use the $50 in offset to buy another ip or do I keep putting all excess funds approx $2 k per month to offset and then pay off old ppor in about 5 yrs or so, as eventually one day we plan to either move back or use income to start paying off others?

    Getting confused about what to do, craig 123 hope you dont mind me asking on your post but these guys gave good comments on yours

    Thanks

    Profile photo of Jamie MooreJamie Moore
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    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hiya adzlea

    I must admit, I read your post a couple of time and I'm still a bit confused with what you're asking.

    My understanding is that you have two IPs, no personal debt and current rent? Is that correct?

    If so, do you plan on buying another PPOR down the track?

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of adzleaadzlea
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    @adzlea
    Join Date: 2012
    Post Count: 15

    Yeah sorry to sound confusing Jamie that’s right, the goal is to eventually own the original ppor currently being rented out and move back there when it’s time to retire, (10 yrs or so) to answer your question no we don’t plan on buying another ppor. My main question is do I utilize the extra $ we have been able to pay into the offset by purchasing another ip or keep paying down the loan?

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