Tax savings vs extra repayments

Interesting situation

$500k loan balance, $900k valuation, $3200 per month mortgage repayment , 5.79% fixed interest rate

Negatively geared property in WA

Mortgage broker has advised a couple not to pay an extra $20k into the mortgage as a early repayment for maximising tax benefit

I say that the tax benefit is less than the money saved on interest over the life of the loan and the extra $20k should be paid into the loan account to decrease the interest calculated

Who is right?

 

I would be looking at getting that interest rate down and then putting that 20k into offset

 

Yes - offset and interest rate.

But fundamentally you are correct - I would prefer to save a dollar and not have the tax deduction.

 

It depends.

Single person involved? v 2 with different incomes.

PPOR debt?

Paying down the loan will save interest but it will have tax consequences if money take out again.

 

Is the person on top tax rate? Could they put the $20k elsewhere non deductable debt, ETF yielding 7% FF?

 

How much is the break fee?

 

Yes PPOR debt?

Intention to sell before 7 years is up and or keep vacant beyond 6 years if capital growth has not occurred.

 

$22000

 

Both incomes in the 100k bracket each.

No other debts?
ETF is interesting do you have one in mind?

 

Yipes! The break fee is $22,000 and you are seriously suggesting they break their fixed rate by paying their loan down by $20k? Are you sure?

 

If they pay 20k there is no break fee. If they pay more then that then it's a break fee situation.

 

That makes more sense

 

I don't think we can take aim at the broker without knowing the reason behind the recommendation.

The simplest for me is they have other non deductible debt that the 20k they have would better be serviced paying out. For example a car loan that may have 8% interest or a credit card with 17%.

 

Check out the thread in other asset classes.

 

Chuck the $20k in an offset account, unless there's other non deductable loans with a higher interest rate. This gives the same interest reduction as paying it into the mortgage, with the option to remove the funds at a later date keeping the integrity of the loan intact.

 

Can you offset a fixed rate loan?

 

Only with some lenders.

 

Some of mine are fixed with offsets.

 

Fixed interest accounts don't have offset options, not in this case

 

I asked this question and was told yes, you can still have the offset.

When the docs came there was a lot of fees and clearly said the offset account would remain, but not be offset anything, so in other words, no.

So I called back, clarified etc, now I get a letter saying our acc has changed to P&I, yet this was never even discussed.......lol... dealing with banks is like episodes of some Mothers do ave em or Mother and Son

+1 20k in offset or against other non deductible