All Topics / Help Needed! / Robbing Peter to pay Paul?

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  • Profile photo of kirbonavichkirbonavich
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    @kirbonavich
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    I have a curious question and hope someone may be able to guide me in the right direction. 

    I have an outstanding loan of $304k for my property and a separate account with $19k in it, my question being this – What works better for me, keeping my $19k and add savings to it to earn interest or put all of that money on my loan to bring down interest. Obviously I am paying tax on interest that I make, but I'm also loosing potential tax claims if I pay down the loan… So I'm not sure if its a "Robbing Peter to pay Paul" scenario… Advice? 

    Profile photo of Jamie MooreJamie Moore
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    Hi there

    Just so I understand this correctly.

    You've got a $304k loan and a savings account with $19k sitting in it?

    If so, I'd be placing those funds in an offset account against the loan. That way, you reduce interest and don't pay tax on interest that you earn  – and you also don't risk contaminating the loan when you withdraw the offset funds.  

    Is this property an IP or a PPOR? 

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Profile photo of kirbonavichkirbonavich
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    That's correct Jamie. 

    The property is a IP. 

    Thanks for the advice. 

    Profile photo of Jamie MooreJamie Moore
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    No worries.

    Do you have an offset account setup?

    If not – is it a possibility with your lender?

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Profile photo of kirbonavichkirbonavich
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    I believe so, I have a smart access account with the commonwealth bank that I believe works as an offset account. 

    Profile photo of Jamie MooreJamie Moore
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    Hi again

    The smart access is a standard transaction account – not an offset.

    CBA have the Mortgage Saver Interest Account (MISA) which isn't quite a normal offset account. It will offset interest – but it's a pain when it comes to moving around funds.

    However, they are also in the process of rolling out a new transactional offset. You should consider one of these accounts when their available.

    If you've got a PPOR – link the offset to that loan instead and park your spare cash in there.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Profile photo of JoshMagJoshMag
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    Hi Dave,

    My mortgage is also with the CBA. As Jamie states there is the MISA account but the CBA also allows me to park as much extra money in my fully variable mortgage as i like and it is free to redraw funds via net bank as often as you like as long as its a minimum of $500 at a time. I believe this has the same effect as an offset account which is how it was explained to me when I was setting it up. That' is how I have been doing it anyway.

    Hope it helps somehow,

    Josh

    Profile photo of Jamie MooreJamie Moore
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    Hi Josh

    Be very careful with redraw – it's completely different to an offset account – especially in the context of property investing.

    Redraw is classed as new borrowings. So if you redraw from an IP loan – and use those funds for personal expenses, you will contaminate your IP loan.

    It's amazing/scary what some bankers will tell clients!

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Profile photo of kirbonavichkirbonavich
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    Mine is under an Investment Property loan…

    I may just wait for this new transactional offset account to role out. 

    Profile photo of Colin RiceColin Rice
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    Hi David,

    Is your IP loan on interest only or principal & interest payments?

    Colin Rice | CDR Finance
    http://cdrfinance.com.au/
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    Profile photo of Colin RiceColin Rice
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    Colin Rice | CDR Finance
    http://cdrfinance.com.au/
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    Perth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]

    Profile photo of kirbonavichkirbonavich
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    It is interest and principle. I don't believe in the interest only dribble. 

    Profile photo of Colin RiceColin Rice
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    kirbonavich wrote:
    It is interest and principle. I don't believe in the interest only dribble. 

    LOL, thats an interesting way of putting it.

    Do you ever intend to own or already own your own property to live in aka PPOR?

    Colin Rice | CDR Finance
    http://cdrfinance.com.au/
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    Perth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]

    Profile photo of kirbonavichkirbonavich
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    Currently I only own 1 investment property and live with the in laws (it's a big house so its bearable). It is more cost effective for my partner and I to buy another property or two in the near future and providing that they aren't all untenanted at the same time, for a prolonged period of time we will be able to service to loans and redraw for our own home at a later date..

    That's the plan anyway.

    Profile photo of Colin RiceColin Rice
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    kirbonavich wrote:
    Currently I only own 1 investment property and live with the in laws (it's a big house so its bearable). It is more cost effective for my partner and I to buy another property or two in the near future and providing that they aren't all untenanted at the same time, for a prolonged period of time we will be able to service to loans and redraw for our own home at a later date..

    That's the plan anyway.

    If you are going to buy your own place one day in the future then it is advisable to go interest only with an offset account and save the difference that you would normally pay towards the principal amount. 

    Two major reasons for this is;

    1. You preserve the principal loan amount for max tax deductions.

    2. The funds being amassed in the offset can be used as a deposit on a PPOR when you are ready to purchase.

    Without knowing your overall financial position, it would likely be better for you to have an offset connected to you IP mortgage with interest only repayments and your salaries plus rent going into the offset account plus any other spare dollar you have lying around, unless you can get a better return than the current mortgage rate, taking into account you will be paying tax on any earnings.

    If you decide to sell your IP to help buy your future PPOR then no harm done BUT if you hold onto your IP (recommended)  then you will have preserved the principal loan amount and also saved the difference plus any other funds added from salary etc whilst offsetting the IP.

    If you have paid the IP loan down then draw the loan up for a PPOR purchase as you suggested then it wont be tax deductible as the "purpose of funds" is for non tax deductible debt being your PPOR.

    So its not dribble but a smart and efficient strategy on how to best manage your finances whilst also potentially minimising the tax you are paying  .

    Sit down with the RIGHT broker and get them to go over this with you as you are doing yourself a disservice if you don't.

    Cheers.

    Colin Rice | CDR Finance
    http://cdrfinance.com.au/
    Email Me | Phone Me

    Perth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]

    Profile photo of Colin RiceColin Rice
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    kirbonavich wrote:
    Currently I only own 1 investment property and live with the in laws (it's a big house so its bearable). It is more cost effective for my partner and I to buy another property or two in the near future and providing that they aren't all untenanted at the same time, for a prolonged period of time we will be able to service to loans and redraw for our own home at a later date..

    That's the plan anyway.

    If you are going to buy your own place one day in the future then it is advisable to go interest only with an offset account and save the difference that you would normally pay towards the principal amount. 

    Two major reasons for this is;

    1. You preserve the principal loan amount for max tax deductions.

    2. The funds being amassed in the offset can be used as a deposit on a PPOR when you are ready to purchase.

    Without knowing your overall financial position, it would likely be better for you to have an offset connected to you IP mortgage with interest only repayments and your salaries plus rent going into the offset account plus any other spare dollar you have lying around, unless you can get a better return than the current mortgage rate, taking into account you will be paying tax on any earnings.

    If you decide to sell your IP to help buy your future PPOR then no harm done BUT if you hold onto your IP (recommended)  then you will have preserved the principal loan amount and also saved the difference plus any other funds added from salary etc whilst offsetting the IP.

    If you have paid the IP loan down then draw the loan up for a PPOR purchase as you suggested then it wont be tax deductible as the "purpose of funds" is for non tax deductible debt being your PPOR.

    So its not dribble but a smart and efficient strategy on how to best manage your finances whilst also potentially minimising the tax you are paying  .

    Sit down with the RIGHT broker and get them to go over this with you as you are doing yourself a disservice if you don't.

    Cheers.

    Colin Rice | CDR Finance
    http://cdrfinance.com.au/
    Email Me | Phone Me

    Perth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]

    Profile photo of Jacqui MiddletonJacqui Middleton
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    kirbonavich wrote:
    Mine is under an Investment Property loan…

    I may just wait for this new transactional offset account to role out.

    Hi David

    Why wait?  I am assuming your loan is on variable as opposed to fixed (an offset won't help you if you are on fixed).

    The MISA account (essentially an offset account)

    You have $19k in your offset.  The standard variable interest rate with the Commonwealth is 5.9%, and for the sake of the exercise, let's pretend interest is calculated annually rather than daily because it is easier to demonstrate the calculation in a forum post.  Putting $19k in the offset account would save you $19,000 x 0.059 = $1121.  (In reality this figure would be higher since interest is calculated daily and compounds. The true figure is $1154.63)

    Comparing this to the Smart Access Account:

    The interest rate on this loan is 0.01% per annum.  So you would earn $19,000 x 0.0001 = $1.90. From this figure, tax would be deducted because interest earned in a regular savings account is considered to be income.  Let's say you are in the 37% tax bracket.  Your tax would be $1.90 x 0.37 = $.70.  So you would actually end up with only $1.20 in your pocket because $1.90 – $0.70 = $1.20.  Let's not talk about what it would cost you if somehow this modest $1.90 in interest managed to just tip you into the next income tax bracket.  You would actually lose money rather than make money.

    So your choices are:

    Open a MISA and put the $19,000 in there and you will save $1154.63 in a year.

    or

    Leave it in the Smart Access account, and you will save $1.20.

    There is quite a big difference between $1154.63 and $1.20.  The difference is $1153.43.  That can by you a brand new oven if the oven in your IP breaks, and there will be a couple of hundred dollars left over.  Or it can buy you a return flight to an international destination.  Free holiday.  Nice.

    When you end up with a big pile of money in an offset account (or MISA in this case), you could:

    – Pull the money out and use it as a deposit on another property

    or

    – Go on holidays with it

    or

    – Pay some bills

    or

    – Leave it there with the eventual goal of the balance of the offset being equal to the amount you owe on the property, so that you end up paying zero interest (which is sort of the same as having paid off the loan)

    or

    etc etc.

    The difference is that you don't have to ask anyone's permission to withdraw it, and you can do whatever you like with the money.  You can buy $19,000 worth of shoes if that's what you want.

    With a redraw, it is new borrowings as the boys have already pointed out.  You have to "apply" for getting your own money back you see, and there will be a fee for doing so.  And the answer to your request might be no.  Just think if you had lost your job and thus in the eyes of the bank, you had no way of repaying the redraw.  They could opt not to give you the money.

    Hope this helps clear a few things up.  I think you would be crazy not to have an offset account (or MISA) and store as much of your spare cash in it as you possibly can.  It is essentially a place that you can earn tax-free interest, at a much higher rate than is on offer in a savings account, and it doesn't increase your taxable income (so doesn't put you at risk of creeping into the next tax bracket).

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
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    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of Jamie MooreJamie Moore
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    kirbonavich wrote:
    It is interest and principle. I don't believe in the interest only dribble. 

    Hi again

    Given your future plans to purchase a PPOR at some point – this belief will end up costing you big time.

    You've mentioned that you're doing to "redraw" against IPs later on to purchase a PPOR – this is a big no no.

    You need to seek professional advice asap – not doing so is going to cost you a lot in the long term as you're going down the wrong path with your current structure.

    I don't mean to sound blunt – but you'll end up thanking me in the future.

    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]

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