Should I pay off my PPOR or IP first

Discussion in 'Investment Strategy' started by dalepop, 4th Mar, 2020.

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  1. dalepop

    dalepop New Member

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    Hello
    I have just built a new house and rented out my old one, could I please get some advice?

    I have two loans (I will soon refinance to better rates)...
    PPOR - $340,000 at 3.5%
    IP - $220,000 at 4.0%

    I have $20,000 currently sitting in my redraw for my IP, which brings down my interest paid.

    My question is, should I move this cash into my PPOR account instead and try to pay this off first? Tax wise would this would be better in the long run? Or should I keep the money in the higher interest rate?
     
  2. D.T.

    D.T. Specialist Property Manager Business Member

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    When choosing which loan to pay off, pretty much always PPOR over IP. Unless you have plans in the next few years of moving?

    If its from a redraw though, i'd be very cautious about the tax implications of taking it out.
     
  3. Ryan23

    Ryan23 Well-Known Member

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    Might make things worse if you are taking from and investment loan redraw to pay off a non investment loan.
     
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  4. dalepop

    dalepop New Member

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    Ah, thanks. When I decided to move the $20,000 from my savings, I called the bank to set up an offset account they said to just put it into my highest rate mortgage and that way I can access it when ever i like, and still pay less interest. Guess i got duped.
    So best option from here would to be to leave it and pay any savings onto my PPOR mortgage?
     
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  5. Lindsay_W

    Lindsay_W Well-Known Member

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    Terrible advice, unfortunately typical when dealing direct with a bank.
    By putting the cash into the investment loan (now available as redraw) you can 'muddy' the loan from a tax deduction perspective IF you now use that $20K for non investment purposes.
    Ideally you would have put the $20K into an offset account against the IP loan

    Always try to pay down non-deductible debt (PPOR Debt) first.
    When you refinance consider going Interest Only on the Investment loan (if not already), use the additional cash flow this brings to pay extra off the PPOR loan.
    Seek some specific credit advice, maybe not from the bank though...
     
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  6. euro73

    euro73 Well-Known Member Business Member

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    Correct.
    PPOR debt is non income producing and non deductible
    INV debt is income producing and deductible.

    Pay off the PPOR debt as fast as you can. Its the best thing you can do ( besides inheriting a lot of money, getting a very huge pay rise or winning the lottery) to improve your borrowing capacity, help with holding costs on INV properties, etc
     
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  7. Rex

    Rex Well-Known Member

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    Offset account only, for IP or PPOR. Never put extra money in to a loan account unless for very specific purposes (e.g. redrawing in future for investment purposes), even if it's you PPOR don't do it - you don't know what you might do with the property in the future and tax deductibility is generally destroyed forever on the amount you pay in to the loan account.

    Also when you take income tax rates into account (assuming you earn over $18,200/year) your after-tax savings would have been greater by putting the $20K against the PPOR loan even though it has a marginally lower interest rate.

    Stop everything a read up a bit before before you make more mistakes. Terry's Tax Tips are a good place to start Terry's Tax Tips
     
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  8. D.T.

    D.T. Specialist Property Manager Business Member

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    I think reading the post would have been beneficial?
     
  9. dalepop

    dalepop New Member

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    Yes, very helpful, great community here, thanks for your advice.
     
  10. Trainee

    Trainee Well-Known Member

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    Assuming you make an average wage. (All figures approx check everything with accountant)

    The after tax cost to your investment loan is 4% x 67.5% = 2.7%. (Interest less tax rate)

    the after tax cost to your ppor loan is 3.5%. (Interest rate)

    learn the difference between redraw (a new borrowing, with all the rules around deductibility) and offset (not a new borrowing, be careful of what the source of the money is).
     
    Last edited: 4th Mar, 2020
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  11. Jess Peletier

    Jess Peletier Mortgages, Finance & Property Strategy Aust Wide Business Member

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    Hey @dalepop and welcome to the forums :) As others have said, pulling the finds out of your INV and plonking it into your PPOR loan will have tax implications, so best to just leave it there for now.

    You can redraw it for investment purposes later, when the share market crashes ;) (But get advice so it doesn't become messy!)

    Definitely set up an offset on your PPOR for any savings moving forward - never use redraw, especially on a property that might at some point become an investment.
     
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  12. euro73

    euro73 Well-Known Member Business Member

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    What didn’t you understand Dave?
     
  13. D.T.

    D.T. Specialist Property Manager Business Member

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    He’s talking about pulling it out of his redraw but people seemed to gloss over that bit
     
  14. euro73

    euro73 Well-Known Member Business Member

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    in his first post he was . In his second post , which is the one I replied to , he asked whether his best option was to leave it where it is and start paying savings towards his PPOR. See below

    My response started with “correct” in response to that.

    I think reading his second post would have been beneficial before you wrote your third :)
     
    Last edited: 4th Mar, 2020
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  15. Terry_w

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

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    The best strategy is to pay off the non-deductible debt first. You want to shift the security of the loan of the IP slowly over to the main residence and end up with unencumbered investment properties with 80% loans against the main residence but interest full deductible.
     
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  16. dalepop

    dalepop New Member

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    Thanks again everyone. Looks like I better go get some professional advice. Bit hard to find decent independent advice in Bendigo however.
    Another question before I do so... If I were to buy another IP using my initial IP in the near future, would this help negate my mistake? Or is it always better to leverage my PPOR, even in this case?
     
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  17. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Im sure u can find a decent tax accountant there.

    if not may have to travel a bit or use skype ?


    ta
    rolf
     
  18. euro73

    euro73 Well-Known Member Business Member

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    The 20K error/mistake is locked in. It's tiny though. Interest on 20K is a few hundred bucks a year... any deductions are worth 32.5%, 37% or 45% of a few hundred bucks a year. So it makes no material difference to the deductions for that property, and no material difference to your neg gearing /after tax results. I really wouldn't sweat it.

    To the other part of your question - whenever you "|everage" equity to get into the next INV purchase, its important to understand that its the purpose/use of the funds that matters, not the security/property that is used. ie Whether you borrow against equity in your new PPOR or your INV property to purchase additional INV properties isn't especially relevant. Whichever property you use , the debt is deductible as long as it is used exclusively for INV purposes. So if you set up a new loan split for 100K against the INV property for example, and then use that 100K towards INV #2, the interest paid on that 100K is deductible. If you set up a new loan split for 100K against the PPOR , and then use that 100K towards INV#2, the interest on that 100K is also deductible. In both cases, you would have borrowed 100K and used it for INV purposes exclusively, so in both cases the interest is deductible. The property that you secure the 100K with isnt relevant ...except from an interest rate perspective perhaps.
     
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  19. Trainee

    Trainee Well-Known Member

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    The issue isnt so much using it to buy investments.

    its that you lost out on some interest savings, and flexibility around using that 20k for private purposes.

    but really 20k isnt much. Just learn how to do it from now on.
     
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