Loan Structure

Discussion in 'Loans & Mortgage Brokers' started by Ideacrash, 5th Aug, 2019.

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  1. Ideacrash

    Ideacrash Well-Known Member

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    Hi All,

    At the moment I have two loans ( OO P&I variable ) around 300K each with ANZ. I have around 100K in the offset linked to one of the loan. Now since there are attractive options I am now stuck with the below structure. It would be great if you can throw some pros and cons with the below strategies :

    Strategy 1:
    Fix one of the loan at 3.18 for 2 years or 3.28 for 3years
    Leave the second loan with variable at 3.42 with offset

    Strategy 2:
    Fix both the loans at 3.18
    Invest the offset money in ETF/LIC's
     
  2. Trainee

    Trainee Well-Known Member

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    What exactly are you trying to achieve? Fixing the loan gives you certainty. Strategy 2 increases both risk and returns. If the loan is PPOR, using the offset increases your nondeductible interest. Ask your accountant about the tax impact of redrawing.

    You are comparing apples to oranges, and missing the pear in the background.
     
  3. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    Strategy 3: Leave the loans as variable. Invest the money as you see fit, leaving it in the offset otherwise.

    The question is, why do you want to fix and why specifically now? If you're fixing because the rates are lower than the variable, are you certain that they won't go lower?
     
  4. Trainee

    Trainee Well-Known Member

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    Think of why fixed rates are lower than variable, op.
     
  5. Ideacrash

    Ideacrash Well-Known Member

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    I am trying to achieve efficient way to make more money and get financial freedom soon.
     
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  6. Ideacrash

    Ideacrash Well-Known Member

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    I think no one can predict what is going to happen. However, I feel we are very close to bottom rates.
    Because, I just reach 80% LVR and was looking for better rates.
     
  7. Sloth Inc

    Sloth Inc Member

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    The wider market thinks the RBA will drop another 0.5% off the cash rate by February next year last I checked. The banks think their costs/rates will drop too, as evidenced by the current variable and fixed rates on offer.

    They might all be wrong, but it does seem ambitious to presume to know better.
     
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  8. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    Speak to a great broker before you invest in LICS - they'll be able to give you some strategies to increase your deductible debt before you fix, if that's what you decide to do.

    Bear in mind, often in the rush to 'make more money' we can 'lose more money' just as easily, so be aware of that and make sure your risk management is in place.
     
  9. Ideacrash

    Ideacrash Well-Known Member

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    Thanks , yes was also thinking of debt recycling as an option . The LOC interest rates seems to be high.
     
  10. Ideacrash

    Ideacrash Well-Known Member

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    strategy 3 :
    Pay the offset money to bank
    Take out new LOC loan
    Invest the money into LIC's or ETF
    Use the dividend money to pay the mortage and keeping the deductible loan higher
     
  11. Lindsay_W

    Lindsay_W Well-Known Member

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    Why an LOC? Why not just a separate new loan split with it's own offset, invest it in LIC's or ETF and it's classed as an investment loan for tax deduction purposes, you'll get a much better rate on the loan split compared to LOC
    If looking to debt recycle this strategy works well with lenders who have a Master Limit product AMP/Macquarie for example.
     
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  12. Ideacrash

    Ideacrash Well-Known Member

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    Thanks Lindsay, I was not aware we could do that. Will explore the option.
     
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  13. Ideacrash

    Ideacrash Well-Known Member

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    Strategy 3 : Expanded with numbers

    Initial Situation
    Loan A + Offset = 275K+25K 3.42 P&I
    Loan B = 325K 3.42 P&I

    Step1
    Pay 25K to Loan B from Offset account
    Split the 25K loan form Loan B

    After Step 1
    Loan A + Offset = 275K+0K 3.42 P&I
    Loan B = 300K 3.42 P&I
    Loan C = 25K 3.42 P&I

    Step 2
    Transfer the Money to Trading account 25k
    Buy ETF's/LIC /Shares 25k
    After Step 2 Assuming 4% return ( 1000) + Franking credits ( 300)
    So total profit = 1000
    Interest Paid on the loan = 855
    So overall Taxable income would be ( 1000-855) = 145
    Franking credits returned = 300$
    If no DR total taxable income would have been 1000 instead of 145.
    Franking credits returned = 300$
    That means I would have saved 320$(37% tax bracket) more from DR strategy

    Step 3
    Pay the monthly instalments to Loan C
    Any additional Savings or Dividends to be paid to the Loan A offset
    Once I have made additional 25K in Loan A offset , pay the additional funds to Loan A and make one more split ( Loan D )

    Repeat from step 2

    I have opted for P&I for the investment loan as it is easy to split to a P&I than to a IO only loan in ANZ

    Are there any loopholes in this strategy ?
     
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  14. Terry_w

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

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    Sounds good to me, but the rate is a bit high.
     
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  15. Ideacrash

    Ideacrash Well-Known Member

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    Thanks Terry, I believe that's the best the big 4 can provide. And , no hassle of moving everything to new lender. Need to explore the AMP product a bit.
     
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