After burning my fingers to use offset saving for IP, this is wat I come up for newbees investors like me; Fixed Interest loan (FI) – Fixed Interest for the period of time; Loan can’t be changed and have huge break cost; Variable Interest loan (VI) – Interest rate fluctuates as RBI rates gets changed; Interest only payment – Pay interest only Principal + Interest Payment – Pay interest and bit of Principal over period of time (Loan amount get decreases with every payment) STEP 1: For PPOR 1. Take variable Interest loan with Interest only payment 2. Or Split your loan into FI and VI loan 3. Put all saving in an Offset account to save Interest amount Loan must have Split loan feature Offset Account feature - Do not take “Fixed Interest loan” for PPOR -> No flexibility of splitting loan / offset acc; - Never pay extra to reduce Principal - it will hurt later if you rent this one out as IP; - Put extra savings in offset account only STEP 2 Buying IP: At that time - Deposit money from Offset account to PPOR loan account to have equity; Redraw equity from PPOR Loan and do a Split on Loan – This will make it clear for what purpose the loan is used for (SPLIT 1) Use equity money to buy IP - Use Interest Only Loan for buying IP -> maximise tax benefit - Deposit all your saving in PPOR offset account Buing Next IP: Use Step 2 again; Or use Equity from IP Do this as many times possible to get deductible interest. Guys is this make sense?? any comments welcome
In general terms its correct but there are many reasons to vary from this. Its often very sensible to leave some portion of the PPOR on variable so that an offset can be attached. If its fixed then as you indicate no offset. An offset on a IP is really useless if you have a PPOR loan... That's where the offset should be for biggest benefit. The changes in banking of late will limit equity access from an IP versus equity access from owner-occupied housing. Its all the serviceability calcs etc and even rates. There may be strategies to repay the owner occupied home for equity so that a new loan to buy an IP can be accessed. The offset is a great strategy but there are times when it may require a repayment from the offset AND a new loan. All the recent loan change issues make it more important than ever to use a broker who knows this backward. There is a wide disparity between bank policies and processes at present.
So if you have just one IP, live at home, is it advisable to use equity from the IP to get another? Reason i ask is because i am looking to get another IP, interest only. I have made several extra payments on the existing IP, rather than keeping money in offset. My understanding what you can only claim the expenses so either way you can only claim on whatever interest you pay. Oviously i missed the point.
Yes, always better to borrow rather than use cash as some day you will need to use your cash for a private expense and the interest on redrawing from a loan won't be deductible. There are also reasons other than tax - maintaining cash buffers, ability to access finance etc.
