Debt recycling on IP (no non-deductible)

Discussion in 'Investment Strategy' started by jprops, 9th Aug, 2017.

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  1. jprops

    jprops Well-Known Member

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    I've been mulling over this idea in the back of my head.

    Everyone knows that investor IO rates are now quite aggressive, encouraging us to switch to P&I. There's even a thread here that discusses when switching makes sense.

    Most talk of using IO is for the purpose of directing excess funds to non-deductible debt... but what about those without non-deductible debt.

    Depending on one's goals and circumstances of course, do you think it may be a worthwhile strategy to take advantage of attractive P&I rates, and setup a line of credit for future investing?

    Not exactly sure of the mechanics, but my theory is convert the whole loan to principal repayments to get a better rate. And setup a line of credit.

    The line of credit rate may be crappier than the IO loan... But it will be much smaller at first. Use the LOC to invest in shares for instance.

    Eventually there will be a tipping point, at which time convert the LOC to an IO loan.

    Thoughts?
     
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  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes, a potentially good way to recycle debt. Pay down the investment loan on PI and tap into the equity to invest further.
     
  3. jprops

    jprops Well-Known Member

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    The only issue I can see is it will reduce your cash savings that you might want for non-investment purchases, such as buying a poor in the future
     
  4. Tony

    Tony Well-Known Member

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    Why not P&I with 100% offset rather than LOC?
     
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  5. jprops

    jprops Well-Known Member

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    The line of credit is for accessing the principal repayments?
     
  6. Tony

    Tony Well-Known Member

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    Understand, but if the rate of interest is the same then doesn't an offset have the same affect of principal repayments without the hassle of a LOC or redraw to access 'principal repayments'
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Tony's right. You may not need to pay down the loan to only redraw it later (at a higher rate). Instead you could pay into an offset and just buy the shares with cash.

    Same result, but maybe slight better.

    The only difference would be
    a) if the share owner and the owner of the property where different taxpayers, and/or

    b) that property would later become the main residence.
     
  8. jprops

    jprops Well-Known Member

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    I agree
    I'm specifically speaking about taking advantage of a better P&I rate? (Over what I get on IO.


    Maybe im misunderstanding this line
    with P&I I'm paying down principal still? Did you mean IO with 100% offset?
     
  9. Tony

    Tony Well-Known Member

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    No
    I mean P&I with 100% offset. The beauty of this product is that you make the minimum P&I payments continuously throughout the life of the loan. Any extra funds that you have sit in your 100% offset account and act as 'additional Principal repayments' and reduce the amount of interest payable, so long as the funds remain in the offset account
    Hope this makes sense
     
  10. jprops

    jprops Well-Known Member

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    It does. What I was hoping to achieve with the LOC was to access the minimum P&I payments made, is this not something you can do with a LOC? Can you only access additional payments? Maybe I don't understand this well enough :)
     
  11. Tony

    Tony Well-Known Member

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    Over to someone else now, as Im not sure how an LOC would work in this regard
     
  12. jprops

    jprops Well-Known Member

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    Thanks for your input, Tony :)
     
  13. KDP

    KDP Well-Known Member

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    Think the main risk with this is that the LOC interest rate may be higher than the normal P&I and it may not be that easy to continually pull out equity. In that instance you're stuck with the trapped equity.
     
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  14. CROMAX

    CROMAX Active Member

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    I still prefer the power of IO and 100% offset - it leaves you in a more powerful position don't you think? I'd just make the voluntary principal payments as you see fit and keep the offset as full as possible. No need to get fancy.

    The other consideration would be if you switch to P&I and the economic climate changes - you might find yourself stuck in a P&I loan. The RBA sound like they are pretty much decided that mid next year rates are going up. I personally want to structure my loans to create the most freedom as possible for myself.
     
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  15. jprops

    jprops Well-Known Member

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    Yes I agree with this. I just refinanced and scored another 10 years IO period. Soon enough, this might be so rare it's worth the cost.
     
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  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    With a pi loan the balance will constantly be reducing. With a full offset attached it will reduce twice as fast.

    So you would need to keep borrowing against the equity. Perhaps once every 2 yrs
     
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  17. CROMAX

    CROMAX Active Member

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    Well played. You're spot on there. 10 years will let you do some damage on that offset account.
     
  18. CROMAX

    CROMAX Active Member

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    P.s may I ask which bank you have gone with?
     
  19. jprops

    jprops Well-Known Member

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    Cba
     
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