Best use of cash? Pay off Ppor or invest

Hey all,

I am in the process of selling my final IP and will be receiving some cash and am not sure what the best use of this cash is.

I recently purchased a ppor, current LVR 80% paying P&I. These are the two options I have come up with.

1. Dollar cost average into ETFs and LICs as I have been doing for the last few years with any spare cash

2. Pay off decent amount of ppor loan and then apply for a line if credit to invest in ETFs/LICs

There is a chance I could move in the future and temporality rent out the Ppor but at the moment I have no intention of buying more property.

Pros/cons?

 

Pay off your PPOR. There is nothing more secure than owning the roof over you and your families head, outright. Sky falls in...you have a roof over your head. Illness. Injury. Incapacity - you have a roof over your head.

if you want to invest, borrow against the PPOR after its debt free, and invest. Yes it means taking on debt secured against the PPOR, but the debt will all be deductible. Don't pay a non income producing, non deductible mortgage you don't need to be paying...and don't use cash to invest if you can use deductible borrowed funds and leverage for income producing assets

 

You could debt recycle the cash through your home loan and get the best of both worlds.

 

This is what I am interested in. This just means paying off the home loan and getting a line of credit to invest yes? Who do I talk to about this? My bank? Broker?

 

You will need both credit and tax advice

 

What's your interest rate? If it's below 3% there really isn't much point paying off your loan. Put it in an offset and invest. Although market has recovered somewhat and best time to buy was a month ago.

 

Agree with patto not much point using all your money to totally pay of a mortgage if paying 3% interest, You could keep some money in an offset for a buffer and for oportunity whatever your comfortable with. Terrible idea to base investment decisions on meagre tax savings. Put your money where you get the best returns. If you cant get 3% return you shouldnt be investing fullstop, wether it is deductable or not. But investing could enable you to pay down your loan, in a few years instead of decades . It is important for security to reduce your PPOR debt quickly as possible in the case of illness or injury and have built some liquid assets. You may not always be able to or want to rely on working to pay your mortgage so alternatives should be nurtured. Giving up some of the yeilds that have been available in recent months that could give you 10x more than you save in tax doesnt make sense to me. You may find after you pay off your loan in 10 or 30 years interest rates are 20% and ( I have seen them) and after tax deduction are still 5x higher than than nondeductable loans are now.

 

Mortgage broker did my loan. I'm with Suncorp and the interest rate is 2.78%. No offset account.

The other option I was considering was a margin loan against my current share portfolio but I was under the assumption it is higher risk and higher interest rates.

 

So your saying to pay off x amount of the loan, only to borrow the same amount just for the tax deduction? Why would you bother with this what's the point? Just use the cash for investing, or pay towards the loan and leave it paid off

 

If you are asking the question pay off loan or invest it means you don't understand the concept of debt recycling and are needlessly throwing money away. at 3% interest you would be throwing away $300 in extra deductions for every $10,000 invested which could be as much as $140 or so in your pocket.

It may not be much but it is better than not receiving it.

 

I suppose I'm used to having investment properties and now that I've gotten rid of them it just seems like a waste not to have any deductible debt...

 

The debt becomes tax deductible and you get the investment return as well, if just using the cash then you wont get the tax benefit.

 

Using cash you get the benefit of not having a repayment though? Am I missing something, why pay $1 to save 30c when there is an option not to pay it in the first place?

EDIT: I think I get what you're saying now, if you have a repayment already, you may as well make it tax deductible, but still the unencumbered earnings from the investment if paid with cash I think would still potentially outweigh the tax deduction.

 

Definitely broker - your bank won’t have a clue what you’re talking about. And neither will most brokers tbh!

 

But in the scenario you mention the OP would still have the non-deductible debt against the property if the cash was used for investment instead of paying off the loan therefore could be worse off technically.

 

That's not quite right. You only get the deduction if your investment is not making positive returns, in which case you are banking on future capital gains, and that is most definitely not money "in your pocket".

 

You get a deduction whether the investment is making a positive or a negative return. You seem to misunderstand that if you are going to invest anyway you would be worse off using cash while you have non-deducitble debt.

If you don't believe me do a simple example

 

Going to try do a scenario more for my understanding of how it works.

Let's say he has 50k to play with, a ppor mortgage of 200k, IO with repayments of $1000pm and a flat tax rate of 30%
And the potential 50k investment returns 10% pa

He could either:
1. Add the 50k to loan and borrowing to invest the same amount-
Now $250 of the $1000 repayment is deductable or $3,000 pa
$5,000 pa investment earnings minus 3000=
$2000 taxable income.
2000/100*30=$600 in tax to pay
$3000/100*30= $900 tax saved
Net earnings= $1400

2. Invest 50k cash,
Taxable income: $5000 p.a
Net earnings from investment: $3500

We are not saving the $900 in tax as in the first example so ill take that off.
3500-900=
Net earnings: $2600

What am I missing here?

 

The debt recycling part!