Ideas to turn $600 per month into $120k in 10 years?

Hi all...

I have an IP in the UK on a very low IR mortgage which runs to June 2027. The mortgage is dirt cheap and I really don't want the hassle of refinancing from overseas, so will work toward paying the house off by June 17 when the mortgage expires.

I have been setting aside an amount per month in my offset to cover the shortfall in 2027, but it is the first pot to get dipped into in emergencies, so each year when I review our position I have to increase my monthly pot allowance to make up for what I dipped into!!!

Conservatively, taking into account the current outstanding balance and what the income from rent which stays in the UK will bring the balance down to in 2027, I reckon I need to "make" about 120k in the next 10 years to have enough to pay it off when the time comes.

Safest way I guess is keep accruing it in the offset, as long as we have a PPOR mortgage then that's getting on for the equivalent of about 8%+ return, (based on it being a guaranteed return of say 5% by way of the equivalent saving off the PPOR interest, but based on our income tax bracket we'd have to earn over 8% on an investment to get the same net return as sitting it in the offset).

The problems with that are two fold, firstly, too easy to dip into as above and secondly the offset saving doesn't get added back to the "pot", so the pot only really grows by the amount we put into it as the return, (or interest saving), is knocked off the PPOR interest bill instead. I could work out the difference and add it into the pot each month I guess but that doesn't help with the dipping into it issue.....

Anyway, enough babbling, what I am looking for is ideas for a term deposit or some type of unit trust share maybe? I have an account with NAB share trader that I have yet to use, so I have access to shares but I don't want to be continually monitoring this. I'm happy to look at something that locks away what you've already committed if it means better returns, but I would like flexibility in that if I need to cut back for some reason I could stop paying into it for a while.

The goal would be to turn a regular $600 per month deposit into $120k (net) in 10 years at relatively low risk.

Any ideas?

EDITED - fixed the payout date, should have ready 2027 not 2017

 

Hi @Propagate

I am confused.. I could be wrong but the way I read the post , in the opening paragraph it says your aim is to pay off the UK loan by 2017. But later it says you aim to pay it off in 10yrs. Which is it? Also is it i/O or P&I ? What is the balance and interest rate? Does it have an offset The emergency pot you speak of.. which account is that?

 

Use Excel formulas - pv function

To save $120k in 10 yrs @3% pa = $885/mth

You plug in your figures

If you're keen use a 10 year insurance bond, no tax payable after 10 years.

 

...sorry @JacM - that should read 2027. Loan finishes June 2027, so just over 11 years but figured I'd aim for a round 10.

It's I/O, balance is currently 95k (GBP) but will have reduced to approx 60k (GBP) via the rent in 10 years time,. (assume $120k AUD in 10 years time to be covered). No offset facility on it and the rent stays in the UK at a paltry interest rate. Loan interest rate is 0.99% (yes, less that one percent).

The emergency pot is the sum of the $600 per month that sits in our offset in Australia against the PPOR. So, essentially if I just saved that $600 per month up, in 10 years I'd have $72k, the offset interest saving would have been taken off the PPOR loan and I'd come up short by $48k to pay the UK house off. I call it the emergency pot as it has been dipped into in the passed so need something that's more locked away.

So, in essence, I want the $600 per month work harder for me than it currently does, to the tune of turning into $120k net over 10 years.

Thanks @Scott No Mates I'll fire up Excel now and look into the insurance bonds.

Cheers.

 

..OK, might have to think outside the box a bit more, or increase the monthly allowance!

Using the FV Excel formula, $600 per month for 120 months I'd need a consistent return of 9.5% for the 10 years to hit $120k

 

Consider this:

Pay down your PPOR loan by $127,000 and reborrow to pay out the UK loan. Continue to claim the interest on the $127k split against the UK rent.

 

Did you allow for the tax man?

It will be tough without any risk. Terry's suggestion makes a lot of sense to me.

 

@Hodor No, that's 9.5% gross, tax to come off too...makes it even harder.

@Terry_w Great idea, gets me around techically not having to pay it off, as long as I have enough equity/borrowing power here to release $120k in 10 years time to do it.

Although, going from less than 1% interest to circa 5%, even after claiming it on tax returns, would be a decent increase in costs. If I can do something so I can pay it out in ten years that would be preferable.

We don't have any exposure to shares outside of Super. I'm thinking maybe increase the monthly allowance to $1000 and start drip feeding into a portfolio of a few select shares? That, or choose a managed fund that I can drip feed into.

 

You would want to pay off your non deductible debt first though. How long were you thinking that would take>

 

I was hoping it would be gone by now, but that was before we started investing in IP's so all the "spare" income that would have paid down our PPOR has been swallowed up purchasing and holding IP's over the last 3 years or so.

I'd like to think that in 10 years time we'd have the PPOR debt gone, assuming we don't do something stupid like move. There's no other none deductible debt other than the PPOR.

The safe and sensible option is to continue to let it accrues in the offset against the PPOR, which as I said in the first post, is effectively like getting a gross return of 8%+. Work toward paying off the PPOR by year 10 then re-borrow enough against the PPOR to pay out the UK house if need be, then continue to claim it as an expense.

Safe and effective, not very exciting but sensible. Probably the best way to go I guess.

 

I would leave the offset as is, BUT at the same time start another account to save up for those things you dip into the offset for. Then simply make the decision that the offset is untouchable unless a life is at stake.

At the moment your offset account appears to be dual purpose, save for the payout but at the same time be a backup savings account.
Marg

 

I'm another who "dips" into the offset. Tax benefits aside, have you thought of just paying extra off the UK mortgage? It is a lot harder to get your hands on.

And rent will presumably increase to take care of balance.

 

@Heinz57 Yes, thought about that but as it's a great mortgage rate, (0.99%) and only adjusted annually on the outstanding balance, it basically no better than stuffing the money under the mattress (aside from not being able to get at it that is). I need it to grow as well.