Forums / Property Investing / Help Needed! / Purchasing a home to live in with 2 investment properties

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

    Hi All

    i have taken aboard advice from here and other sources regarding my investment properties. Interest only with an offset and park any spare cash into the offset.

    In a year and a half I have parked 100k into the offset of a 430k loan. This has greatly reduced my charged interest. Can somebody explain why this method is such an advantage? My tax return has been greatly reduced. It's better than putting the extra cash into a term deposit right?

    My fiancé and I are buying or building a property, so I am assuming the best option is to withdraw all money from investment loan offsets and put towards deposit on our house of residence? (And aim to pay this off as quickly as possible , I guess with an offset also) Should I keep the Investment offsets open?

    Rental return each week is approx $580 after expenses and interest per week atm is about $470 per week.

    Thankyou

    Craig

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069
    craig123 wrote:
    Hi All

    i have taken aboard advice from here and other sources regarding my investment properties. Interest only with an offset and park any spare cash into the offset.

    In a year and a half I have parked 100k into the offset of a 430k loan. This has greatly reduced my charged interest. Can somebody explain why this method is such an advantage? My tax return has been greatly reduced. It's better than putting the extra cash into a term deposit right?

    My fiancé and I are buying or building a property, so I am assuming the best option is to withdraw all money from investment loan offsets and put towards deposit on our house of residence? (And aim to pay this off as quickly as possible , I guess with an offset also) Should I keep the Investment offsets open?

    Rental return each week is approx $580 after expenses and interest per week atm is about $470 per week.

    Thankyou

    Craig

    Hi Craig

    You'll need to pay tax on any interest earned in a term deposit.

    Yep – you could use those funds from the offset to purchase your PPOR – this will boost deductible interest against IPs whilst lowering the non-deductible interest against your new PPOR. Do you think the next PPOR will ever become an IP?

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of Dave WardDave Ward
    Participant
    @dave-ward
    Join Date: 2004
    Post Count: 37

    Hi Craig,

    The only real way to illustrate this is by taking an example and seeing what the difference is. Lets assume the following for the purposes of the illustration (based on your numbers above):

    Income – $75,000

    Property Purchase Price – $540,000 (House and Land)

    Property Rental Income Yield – 5.59% p.a.

    Annual Vacancy Rate – 0%

    Depreciation claimed @ 2.5% of 50% of the value of the property (Div 43) & F & F claim @ $4000 p.a. (for the purposes of the illustration) 

    Annual Rates, R & M, Insurance, Rental Management Fees & Annual Loan Costs – $5,504

    Interest Rate – 4.99% p.a. (Int Only)

    Income – $30,186

    Interest – $21,538

    Expenses – $5,504

    Tax Return – $2,472

    Net Cash Flow – $5,616

    If you were to go and put the $100,000 into an offset account and reduce your loan the investment outcomes would look like this (assuming the same variable inputs as above):

    Income – $30,186

    Interest – $17,047

    Expenses – $5,504

    Tax Return – $988

    Net Cash Flow – $8,623

    As you can see, you are approximately $3,000 per year better off from a cash flow perspective if the $100,000 stays in the offset account. If that $100,000 was to be invested in say a term deposit at 4.5% (Investec who give the best rates at present), you would make $4,500 p.a. but then have to pay tax on the earnings at your nominal tax rate, which would make you worse off than investing it in the offset account.

    In actual fact you would be better off buying another investment property with the $100,000 and still having a positively geared portfolio as well as a second property with the potential to grow at 6%p.a. + for the next 15 years.

    If you want to know any more about your exact situation, let me know and I will be able to model the scenario's for you. 

    Dave Ward | Geronimo Finance
    http://www.geronimofinance.com.au
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    Property Investor, Property Investment Expert & Advisor, Finance Expert & Strategist

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

    Ok great, thank you very much for that confirmation.

    Another question please. 

    My fiancé owns a 3rd of her current PPOR with her parents, she has a 150k mortgage with an offset of 138k. She now owes 116k on the loan. Her parents do not have a mortgage on this property. The deal is that when her parents pass she will inherit 100% of the property. Basically this strange set up is this way as her parents could not afford the house repayments anymore so she helped them out.

    So my question is, would it be beneficial for her to redraw that offset money and put into our own PPOR? And start again paying the loan off into the offset? I do not think her parents can afford to pay her rent of which she could claim a tax deduction. What would be a good scenario?

    cheers

    craig

    Profile photo of Dave WardDave Ward
    Participant
    @dave-ward
    Join Date: 2004
    Post Count: 37

    The answer to that question is pretty simple. You will be no better or worse off by increasing the loan on one side and reducing it by the same amount on the other loan. The net loan ratio isn't changing and the PPOR that the funds are being drawn from isn't an investment property, so there is no tax benefit gain there. In any event if the offset funds are being used to invest in your own PPOR, then you can't claim a tax deduction on that money in any event. Tax deductibility all comes down to what you are using the funds drawn for. In short, they have to be used for the purposes of another investment to be eligible for a tax deduction. 

    Dave Ward | Geronimo Finance
    http://www.geronimofinance.com.au
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    Property Investor, Property Investment Expert & Advisor, Finance Expert & Strategist

    Profile photo of Colin RiceColin Rice
    Participant
    @fms
    Join Date: 2011
    Post Count: 338

    Well done for implementing the knowledge gained in regards to IO + Offset.  It is a very simple yet effective strategy that is overlooked by ignorance more often than not.

    It is to your advantage to store funds in an offset unless you can get a higher return than your current mortgage interest rate elsewhere, adjusted for tax that would normally be paid. You could place it in a term deposit at 3% and then loose a portion to tax depending on the bracket you are in or leave it in the offset and get a tax free "return" of 5+%.

    If the investment offsets are costing you in fees then best to close them. If not then leave them open.

    Yes. Use the cash as a deposit towards your PPOR. I would still repeat the process with your PPOR and go interest only for 5 years with a linked offset. You never know what twists and turns life will take as your PPOR may be converted into an IP down the track. If not then no harm done. 

    All the best. You are dong great by the sounds of it. 

    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 Colin RiceColin Rice
    Participant
    @fms
    Join Date: 2011
    Post Count: 338
    craig123 wrote:
    My fiancé owns a 3rd of her current PPOR with her parents, she has a 150k mortgage with an offset of 138k. She now owes 116k on the loan. Her parents do not have a mortgage on this property. The deal is that when her parents pass she will inherit 100% of the property. Basically this strange set up is this way as her parents could not afford the house repayments anymore so she helped them out.

    So my question is, would it be beneficial for her to redraw that offset money and put into our own PPOR? And start again paying the loan off into the offset? I do not think her parents can afford to pay her rent of which she could claim a tax deduction. What would be a good scenario?

    I would still preserve as much of the loan principal as possible as this property may become an IP in the future?

    I am a bit concerned that you are confusing offset and redraw in this explanation. If you are don't feel bad as many bank staff don't know the difference either and actually think it is the same thing. It isn't.

    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 craig123craig123
    Participant
    @craig123
    Join Date: 2012
    Post Count: 27

    Your free advice is much appreciated. Thankyou

    Profile photo of Scott No MatesScott No Mates
    Participant
    @scott-no-mates
    Join Date: 2005
    Post Count: 3,850

    The thing to watch with the inlaws' house is that there may be a land tax liability which arises on it as it is not your partner's PPOR.

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