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If your disciplined - do you use Interest Only for PPOR

Discussion in 'Property Finance' started by Seal, 5th May, 2016.

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  1. Seal

    Seal Well-Known Member

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    i have had a lender recommend getting IO loan for my PPOR, instead of P&I. He said you can just pay more that the interest amounts, or you could put the extra in an offset account.

    We are disciplined with spending and won't use any extra money. It could perhaps allow us to build up money to use for next purchase?

    What advice do people have?
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Depends on your situation. this is the ideal, but it can hurt borrowing capacity.
     
  3. Ace in the Hole

    Ace in the Hole Well-Known Member Premium Member

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    What Terry said about depends on your situation.
    You can also go P&I and still put more into your offset, that's what we do.
    Actually, our offset is topped right up at the moment and monthly repayments come out of the offset, so basically we're paying nothing from elsewhere.
     
  4. Sonamic

    Sonamic Well-Known Member

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    It's ideal if you're planning to convert it to an IP in future?
     
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  5. Whitecat

    Whitecat Well-Known Member

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    How? If there is money in the offset for a deposit, no need to borrow so much?
     
  6. Mumbai

    Mumbai Well-Known Member

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    If YOU ARE disciplined! Sorry, couldn't help it.
     
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  7. EN710

    EN710 Well-Known Member

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    I prefer offset so yes, and also because it will become investment in the future
     
  8. EN710

    EN710 Well-Known Member

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    I prefer offset so yes, and also because it will become investment in the future
     
  9. Jerry O

    Jerry O Well-Known Member Premium Member

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    Offset against PPOR loan. Ideal structure as it gives you flexibility to convert it to an IP later on and still get maximum tax advantage.
    If you feel like this will be you PPOR forever, then i would still use IO with offset as it frees up more cash and speeds up the saving process to buy more IP.
     
  10. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Interest only with an offset against a PPOR (if you can get it - not all banks like doing it) can be great for the right borrower. Here's a cut and paste of one of my older blog entries that explains the concept in more detail.

    A question we’re always asked is “should I be paying interest only or principal and interest on my loans?”

    When it comes to claiming an investment loan as a deduction – only the interest portion of the loan is tax deductible. The principal portion is not. Therefore, if you have an investment loan, and you decide to pay off some of the principal each repayment, you’re effectively reducing this tax deductible debt – meaning there is less tax you can claim back.

    This can be a costly mistake for those who also have non-deductible debt (which most of us do). This includes a home loan on your PPOR, car loans, personal loans, credit cards, etc.

    If you want to pay down any debt – it is this non-deductible debt that you should try and knock on the head first. It simply doesn’t make financial sense to pay down your deductible investment debt when you also have non-deductible debt.

    So what’s the ideal structure?

    Generally speaking, it’s ideal to have all of your investment loans set up as interest only.

    With your PPOR debt, there are two choices to consider. If you are a disciplined saver and feel that your PPOR will one day be turned into an investment property, then it's best to also set this loan up as interest only. However, it's important that an offset account is set up against this loan so you can continue to make the equivalent principal repayments regularly into the offset account. The offset account is also a very handy place for parking any spare savings.

    Why is it best to have my PPOR loan as interest only if I think it’s going to become an investment property? Because this debt will become deductible in the future – so you shouldn’t reduce it now.

    Instead, you can place your money into the offset account which will reduce your PPOR interest repayments whilst the funds are sitting in the account. When this property becomes an investment property in the future, you can move the funds from your offset account on to your next PPOR. This way, you've increased your tax deductible debt and reduced your non tax deductible debt.

    The interest only with an offset account doesn’t work very well for someone who isn't a disciplined saver and will be tempted to simply make the minimum interest repayments.

    If you're not a disciplined saver and have no desire to convert your PPOR into an investment property at some point, then it's best to have a principle and interest loan on your PPOR. Once you've paid off your PPOR loan and any other non-deductible debt, you may wish to start paying down your investment loans.

    So in a nutshell, interest only for all loans with an offset account set-up against your PPOR loan can be a great overall structure – particularly if you think you might turn your PPOR into an investment property at some point. On the flipside, if you have no desire to turn your PPOR into an investment property down the track and you are not disciplined with money- then it’s best to have interest only against all investment loans and principle and interest against your PPOR.

    Hope that helps.

    Jamie
     
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  11. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    IO with 100 % offset is PI at the borrowers option.

    Its the option bit where discipline comes in

    For some borrowers with so so history, there is NO option of IO- its not responsible lending ..........

    ta

    rolf
     
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  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Not sure what you mean. Are you suggesting you use offset money to pay for a deposit on an investment property? You would be throwing money away if you did this.
    Tax Tip 9: Don’t use Cash in Offset account to Invest

    IO hurts borrowing capacity because of 2 main issues:

    1. Most lenders now days assess someone's existing debt repayments as PI over a loan term which excludes the IO period.

    Example of a $500,000 loan

    IO on a $500,000 loan at 5% = $2,083 per month

    PI on a $500,000 loan at 5% = $2,684 per month

    2, you are not paying down debt.
     
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  13. citystar

    citystar Well-Known Member

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    My PPOR is set to IO. I am disciplined with saving money in my offset which this is linked too. I don't know what is going to happen down the track. I might end up with a good job opportunity in Sydney or Melbourne and my PPOR will end up as an IP. Plus with the offset account it's the same as being P&I however it gives me control over my money rather than giving it to the bank.
     
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  14. DanW

    DanW Well-Known Member

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    We chose IO for lower risk even with PPOR. Anything can happen so it's good to have lower contracted repayments.

    As an example I know someone who got made redundant recently. Could not afford 2 mortgage payments at once because one was P&I so had to sell a property.

    If it had been both IO, could have had better cash flow until they found a new job AND the buffer in the offset would help them make the repayments in the meantime.

    If P&I is wanted, one can take IO and just pay the P part manually (but not be contractuwlly obliged to).
     
  15. Richard Taylor

    Richard Taylor Mortgage Broker & Brisbane Buyers Agent

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    Regretfully lenders still assume your loan is fully drawn and base the " Öther Mortgages" liability on the limit not current net amount.

    Cheers


    Richard
     
  16. Whitecat

    Whitecat Well-Known Member

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    So go P&I with redraw if you intend to move out and make that ppor an ip?
     
  17. Richard Taylor

    Richard Taylor Mortgage Broker & Brisbane Buyers Agent

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    Hate to say the interest on the redrawn funds would not be Tax deductible.

    Classic error as the interest becomes contaminated when redrawn.

    Cheers


    Richard
     
  18. DanW

    DanW Well-Known Member

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    Not redraw, that's too hard for tax.
    I would put the extra cash into an offset (but not the same one you access for every day spending)
     
  19. Whitecat

    Whitecat Well-Known Member

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    A ppor with offset?
    I don't like the idea of paying it down if going to move out later but I recognise the advice about reducing borrowing power.
    Complex.
     
  20. D.T.

    D.T. Adelaide Property Manager Business Member

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    I'd only use IO if I planned on making the PPOR an IP at some stage in the future.

    Reducing / removing non deductible debt is a very under-rated way to both serviceability increase and wealth.