Question about PPOR Mortgage & Share Investment

Hi all,

Have been a lurker on these forums for quite some time, have been reading one of Noel Whittaker’s books and he has mentioned the importance of paying down non-tax deductable debt asap, but after doing some calculations, it doesn't seem like this is the best thing for me..

Here are some details about myself:

Age: 25
PPOR value: 350k (est)
Mortgage: 325k
Shares: 30k
Mortgage term: 30 years
Total 30 year payment: 618k (Interest 274k)

I can afford to deposit 2k per month (24k a year)

This would mean the mortgage would be paid off in 9 years.
This means my total interest paid over 9 years is 80k (rather than 274k across 30 years)

However, for these 9 years, I wouldn't be utilising these 24k deposits, where I could be depositing them directly into my share portfolio, which is mostly STW (ASX200), the average total return across 100+ years is 11.6% (When dividends are reinvested), and by missing out on these first 9 years, the difference at the end is astronomical, this even takes into consideration the additional deposits I’ll be making after year 9 and the mortgage is paid..

The first 9 years (across a 30 year time span) is essential to get that compounding starting, and actually heavily outweighs the benefit of paying less (non-tax deductable) interest (according to my calcs).

Any ideas, suggestions or help on this would be greatly appreciated; I know how many knowledgeable people there are on this forum and would love to get some insight.

Thank you!

 

I think you should read up on the concept of debt recycling.

You can pay off a non-deductible debt, reborrow and then invest. I have written a lot of posts on this - look in the tax forum

 

Thanks for the responses @Terry_w & @Rolf Latham ,

My mortgage loan is Interest and Principal, will this have an impact when I want to split the loan?

So basically the process would be split the loan with say a 30k chunk,
So Loan A = 300k, Loan B = 30k.. I would pay off the Loan B chunk, and then redraw the 30k to purely use for investment purposes.

I would then have a non-deductable mortgage of 300k and a 30k loan where the interest is tax-deductable... i'll put the 30k into an index fund share portfolio.

So does the split of 30k have to be interest only? is that even possible if my current mortgage is already interest and principal? would that be a difficult change?

Should/could I then start drawing down on the built up equity in the property to buy more shares? Or could this get me in trouble with raising interest rates etc..?

 

It doesn't have to be IO, but it might be a good idea so that you can pay down the non-deductible portion faster.

See my
Tax Tip 13: Simple Loan Structuring Strategy https://propertychat.com.au/community/threads/tax-tip-13-simple-loan-structuring-strategy.2601/

 

Hi again, @Terry_w & @Rolf Latham

I've recently got in contact with my finance broker, I discussed the two options, hoping you, or anyone else on this forum can give me some suggestions..

I can go ahead with the Line of Credit and draw down on equity at an interest rate of 5.78%, the only down side i can see to this is IF by some chance the property goes down in value I would have a LVR of >80%, so this could mean i'd put money into the principal of the loan, have it valued and could lose out...?

My broker told me that if I split my existing home loan then the base variable rate of 4.76% would apply, they also said it might be best to change over the entire loan type to make this more financially viable however a new application would be required...

Does anyone have any recommendations or suggestions, it would go a long way! Thanks!

 

Which bank are you with?

 

@Jess Peletier Commonwealth bank

 

very high rates.

If the existing loan is split what method will you use to pay for the inestment?

 

If i went down that road, basically I would push for trying to get smaller splits like 12k or 24k splits, I would pay out each splits every 6 months or so and redraw on 100% of the split..

I would invest that in VAS index fund and divert my dividends directly into paying the interest on the drawn down part of the loan.

I would also divert any surplus (positively geared) dividends into the splits, along with any tax refunds from the interest paid on the split I would accelerate the splits to be paid down, try and snowball paying down the mortgage...

Do you think this is optimal? @Terry_w

Thanks!

 

Tax Tip 13: Simple Loan Structuring Strategy https://propertychat.com.au/community/threads/tax-tip-13-simple-loan-structuring-strategy.2601/

 

You should be able to get better rates than that with CBA - your broker can put in a pricing request. Very easy to do all this with CBA.

 

Just a few things from the loan structuring I needed some clarifying on: @Terry_w

The splits can be adjusted to suit you needs. The smaller the splits the quicker you can start investing without creating a mixed loan though. I have just done one with $25k splits.
My loan would be 100% used for investment purposes, wouldn't mix it at all.
When you say "adjusted", this would require refinancing i'm assuming?



don’t close this loan, but use it to invest. Borrow to invest and then implement a debt recycling strategy
Here is what my broker said to me:
"If you were to split your existing home loan then the special interest rate is not guaranteed on the splits. Also, if you chose to make interest only repayments to these splits then you would not be able to redraw any additional repayments.
This redraw feature is only available on Principle and Interest repayments on your particular loan type."
"If you would like to proceed with creating separate home loan facilities then I would suggest changing loan types to have more flexibility. I would recommend changing from the 3 year rate saver to the standard variable home loan type.
This will result in a higher interest rate in addition to an annual fee of $395 so it is not financially the best option however it will allow you flexibility with setting up separate home loan accounts."



set up the offset attached to Split A first and don’t pay the loan down but put the extra money into the offset and then when you want to invest ideally you would not pay the loan down, but borrow first.
So the money you collect over time goes into the offset for split A, then when you're ready to invest you borrow against split A before paying down the loan..?

 

Get better rates with the line of credit? What would you consider a good rate? 5.78% did seem quite high..
@Jess Peletier

 

1. Where there are different uses the loan will be mixed, even where all different uses are investment. Interest can be apportioned so not necessarily a bad thing.

Some lenders allow readjusting splits without needing to reapply – a good one is AMP

Refinancing no necessarily needed





2. Whats the question here?



3. No. save in an offset when you have non-deductible debt. Just before you want to invest pay down the non-deductible loan set up a new split and then invest.



Where you have equity and can borrow it would always be more preferable to borrow rather than paying down a loan.

 

I feel like a line of credit would suit my situation better...

For me to split I would require a refinance and possibly looking into what @Rolf Latham suggested with a whole new standard variation loan, but the thing that I don't like is the splits have to be paid down rather than just utilising equity..

but with an LOC, I can utilise equity when the property increases in value and draw down on that...
Also LOC means I can continue utilising a low rate of 4.29% interest on the mortgage.
Do you think this would be best for me? Or do you think the comm bank LOC 5.78% is too high? @Terry_w

Also really appreciate all the help... very thankful.

 

Why is this? With CBA it's usually just a form to switch product or split the loan.

 

A LOC would be idea. Have you seen
Terryw’s Ideal Loan Structure https://propertychat.com.au/community/threads/terryws-ideal-loan-structure.6016/

But you cannot simply access equtiy as the property increases in value. You would need to apply for an increase in the LOC which would mean a reassessment.

Yes 5.78% is way too high