paying with inflated dollars

Discussion in 'Investment Strategy' started by clemont, 27th Oct, 2015.

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  1. clemont

    clemont Member

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    Hi all

    I did a search on inflated dollars and can’t find any on the forum. I read about this - http://www.heracliteanriver.com/?p=478 (non- Australian based) and not sure if I am interpreting it correctly> “don’t pay your mortgage down, invest instead and let inflation do the work, cheaper to paying with inflated dollars in the future”.

    This is my scenario, wife works part-time, wants us to pay down loan on PPOR. I can put aside $400 fortnightly to park in offset and once it become say $5k to buy shares. What can I do now to get the $15k (to buy shares) to become deductible?

    PPOR > $435k non-deductible loan, interest only (already paid extra $15k in offset account)
    IP1 > $485k loan
    IP2 > $145k loan
    Shares > $20k

    Hope it makes sense.

    Cheers
    clem
     
    clemont, 27th Oct, 2015
    #1
  2. joel

    joel Well-Known Member

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    The general idea is that after a certain number of years (decades) your wages and the value of your investments will grow at the rate of inflation, but the total debt will remain the same, hence your LVR naturally decreases. This is much more effective when inflation is high - it is currently only 1.5%.

    Regarding your question, has the $15K been paid into the loan, or is it cash sitting in your offset account?

    If it is the former, you can secure a new loan against the equity in your PPOR, and if you buy shares with that loan, the interest will then be deductible. But then you'll have more debt secured against your PPOR which is against what your wife wants...

    If it is the latter, then for shares to be more profitable than just keeping the $$ in the offset account, they would need to yield about 7% before tax (as the offset $$ saves you about 5% after tax).
     
    joel, 27th Oct, 2015
    #2
  3. clemont

    clemont Member

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    Thanks Joel, yeah the $15k has been paid into the loan. Will just park money into offset for now.
     
    clemont, 27th Oct, 2015
    #3
  4. Terry_w

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

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    Terry_w, 27th Oct, 2015
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  5. House

    House Well-Known Member

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    Weird, I was only reading that article a few weeks ago as it's something I was thinking of after I heard about 10 year I/O loans. If inflation averages 3% a year for 10 years, that's 30% "off" your principle as the value stays the same over the years. But after the 10 years you'll be paying with inflated dollars so it'll be a lot less.

    Basic example is a $400k mortgage principle in 2004. 10 years later, according to the RBA that same $400k would now be ~$528k. In the meantime, your wages and rents have increased in line with inflation but your principle does not. I like this.
     
    House, 27th Oct, 2015
    #5
  6. Terry_w

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

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    The power of inflation!

    That is a good way to look at things.
     
    Terry_w, 27th Oct, 2015
    #6
  7. joel

    joel Well-Known Member

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    Just be careful we don't enter a period of deflation ;)
     
    joel, 27th Oct, 2015
    #7