All Topics / Help Needed! / To invest or pay down debt?

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  • Profile photo of Mat-23Mat-23
    Participant
    @mat-23
    Join Date: 2022
    Post Count: 0

    Hello Fellow Members,

    I am a new member and excited to be on here to gain some knowledge and advice.

    I will try to keep it short;

    My partner and I own 3 properties.

    1 is fully offset. The other will be fully offset by March 23 – those 2 both have tenants in.The other we live in and run our business from.

    We have the majority of the loan yet to pay off on our business property, it is fixed interest for 2 more years.

    My question is are we better off to focus on paying down all our debt or look to purchase an investment grade property.

    We have a borrowing capacity from our mortgage broker of 1.5 million, but given the inevitable interest rate rises coming – not sure what to do.

    I am acutely aware of the fact that the longer we wait ( 2-3 years) prices would have risen.

    All advice will be greatly appreciated!
    many thanks in advance

     

     

     

     

    Benny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

     

    Hi Mat,

    You sound like you two are in good shape – sort of.   Having the rentals’ mortgages fully offset sounds like a good position to be in.  On the flip side, that sounds like a lot of lazy equity.   Now, so you know, I am NOT any kind of professional adviser – I’m just a bloke with an opinion or two to share, so do take the time to test any of the following with your favourite professional adviser.

    1.  With the mortgages offset, wouldn’t that mean that you can’t claim any interest on these two mortgages?  And, as they are rentals, normally the expenses from a rental are deductible.  Of course, you might be using a different structure that might change things (e.g. company).

    2.  From your words, it sounds like your own home (the expenses of which are not deductible) is carrying a mortgage.  To me, this would be the one to owe nothing on, as interest on it is NOT deductible.

    3.  Given the above two points, my earliest thought was to take the dollars in offset to pay down (or off) your own home.  BUT, you would need to check on break costs.   As I understand things, when you are breaking a Fixed Mortgage from a LOW interest rate, most lenders don’t hit you too hard as they can then lend the freed up dollars out for a higher rate.  But if your Fixed Rate was higher than the current rates, I think the break cost could be HUGE.   So check it out before doing it.

    4.  Again, depending on your actual structuring, if point 3 was able to go ahead, I would think the mortgage interest from both rentals would once again be deductible after using the Offset dollars to pay down your own home.  This would (or should) help you with your year-end Tax numbers into the future.  And, if your own home was not yet fully paid off, it would be a good one to pay right down.

    5.  Once paid off, your own home would be mortgage free.  At that time, if you were to take another mortgage for investment purposes, then any mortgage expenses would likely become deductible too.   Then again, having a paid-off home is a treasure in its own right, and a welcome oasis in a world becoming more and more financially fragile.

    Once again, Mat – have a think on these, but DO NOT action any without checking first with your own advisers.  Laws and rules have a habit of changing from time to time and, though these worked some years back, will they work today?   Still perhaps some thoughts were useful

    Benny

    Profile photo of Mat-23Mat-23
    Participant
    @mat-23
    Join Date: 2022
    Post Count: 0

    Hi Benny,

     

    Thank you very much for your reply!

    We did get this current structure in place through our broker and accountant – and saw that that structure made sense – however always open to new ways that would be more effective in reaching our goals.

    In reference to the points you made – I will try to explain what I’m thinking

    1 – Because the offset accounts of our investment property is fully offset, and the other one will be fully offset by March 23 – I was under the impression that we are effectively paying no interest on the loans. Maybe its worth me looking at whether we would save more by claiming the tax deductions on the interest paid as opposed to not paying any interest at all?? To add to that – we have been claiming the expenses from those two properties.

    2 – Our home we live in – is the property that is our business premises – seperate section of the building – so we claim the portion of that property for  tax that is used for our business – but not our living space.

    3 – Yes our business property is fixed – and yes there is a break cost – not sure how much though.

    4 – I will ask my accountant today about that.

    5 – and that is the goal – all properties paid off

    I guess it will come down to us whether we want to keep purchasing more investment grade properties. It is nice to sleep well at night too ( with interest rates going up)

    Thank you for your thoughts Benny

    Kind regards.

    Mat

    Profile photo of HomeBuyerLouisianaHomeBuyerLouisiana
    Participant
    @homebuyerlouisiana
    Join Date: 2020
    Post Count: 17

    I think you are best investing in another rental property. As long as you can manage your payments then using more debt to acquire assets is going to build more wealth. You obviously need to ensure your numbers will still work at higher interest rates and also make sure you have reserves to manage any vacancy, maintenance or capital expenditure.

    HomeBuyerLouisiana | Home Buyer Louisiana
    https://homebuyerlouisiana.com

    Aussie entrepreneur investing in New Orleans houses

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