What to borrow.

My accountant wants me to borrow as much as I can from the Bank. The thing is, I don't need the full amount, I have savings to cover a portion of it.

Should i borrow the full amount - i know this will have a better tax deduction however, I'll be paying interest on the mortgage unnecessarily. Yes it may reduce me to the next tax bracket, but the net effect is hard to calculate because what i save from the tax bracket I have to make up paying interest.

I'm a bit torn. Any advice is appreciated. Thanks

 

Borrow max and put extra savings into an offset.

 

Hmmmm. ... depends on LMI rate.... run a couple of numbers to find the sweet spot or suck up the extra expense.

Otherwise, yes, put the extra cash in offset. If it's a large amount of savings you don't really want it all tied up in equity of one property if you can avoid it.

 

Generally borrowing up to 80% and putting cash in offset account will result in a better tax outcome yet save you the most interest.

 

Are you able to give us a broad rundown of the loan structure your considering?

Cheers

Jamie

 

Last week ASIC published a report saying that brokers are guilty of lending people more money than they need and it's creating a conflict of interest and is potentially irresponsible lending. What ASIC isn't seeing is that for many people, it's a case of get the money whilst you can, not when you need it.

If you want to buy your home or an investment then simply concentrate of paying them off, only borrow what you need. If you want to peruse a more aggressive investment acquisition strategy, borrow as much money as you can when you can. In a lending environment where cash is king (and right now this is true more than ever), having cash for deposits already available can mean the difference of another property or three.

 

Wouldn't paying the extra interest negate the benefits of tax deductions?

I already have in mind an offset that will cover 45% of the purchase price. That means I only need to borrow another 55%

But the Bank is allowing me to borrow 100% without extra insurance. so effectively if i do this, I'm paying interest on an extra 45% which I do not need. How would this save me the most interest? If i borrow what I need, i only have to pay interest on 55%, if i borrow the full amount, that means i'll be paying double the interest.

 

If you borrow $100k and keep $50k in offset or borrowing $50k the interest would be the same.

Watch out for cross collateralising securities. Make sure you only use one property to secure a loan.

 

This sounds like a bad structure to me.

It sounds like it's cross collateralised. I suggest you speak to one of the excellent brokers on this forum and get some specific advice as there's most likely a better way to go about this that will help you acheive your goals rather than hinder them.

 

Can you please elaborate a bit more on this, what do you mean use one property?

Hypothetically, if I have 80k of saving in my account and the price of the property was $130k. I use 60k from my 80k as part payment to the purchase of the property. This means I have 70k I need to borrow. I borrow 70k and use the remaining 20k in my saving to offset the account. This means every month I pay interest on only 50k.

Instead if I borrowed the full $130k, I have 80k to offset. Again the net result is I pay interest on $50k.

So why would I pick the full $130k as oppose to borrowing 70k? I still can't see it.

 

Read my tax tips.

Say you wanted to buy a $50k gold plated toilet-for personal use.

If you used all of your cash on the purchase you would have to borrow to buy the toilet and the interest would not be deductible.

But if you had borrowed the full purchase price and had $50k cash in the offset you could use this cash to purchase the toilet. Interest on the loan would go up and this would be deductible.

Same interest in both situations but tax deductions are different. This would be around $2500 per year at 5%

 

2 properties as security for one loan is called cross collateralising and it should be avoided.

 

Ah I think I understand now. I think you example is great, illustrates it well. I'm going to put it in my own words to make sure I'm getting what you are saying. Can you please verify I have understood you correctly?

So whether I borrow 100 pc or 50pc, the interest I pay the bank is still the same ( initially I thought it was more but now I think about it it's the same because of the offset). The benefit here is that if I borrow 100 pc, any expense I have comes out of this loan hence tax deductible. Whereas, if I just borrow enough, then in the event of emergency, I will need to borrow more - are you saying because it's not property related so won't be tax deductible? Whereas if I borrowed the full amount, i can use it and tax deduct at the same time?

Sounds a bit more logical now.

Are there any disadvantages of borrowing the full amount besides seeing a bigger figure of debt in my bank account?

 

I think my bank has done this. They use an existing property as equity to get me my second loan. I have paid off about 80 pc of the first property. So the market value of the first property is enough to cover the remaining mortgage owing plus the borrowing amount.

So say I have 200k left on existing loan and that property is now worth 700k. The new property I am buying is 300k. So there is enough value in this property to cover ther 300k since I have paid off 500k already. Is this the way it works?

I'm not sure whether both property are securities or just the first one. If it's just the first property as security, thats not considered as crossing is it? If they have both as security, how to untangle it?

I was actually hoping to top up this first mortgage by 300k without the need of doing a second mortgage. Is this ideal?

 

Yes

 

Don't let your bank cross securities. Same can be done by keeping one property per loan. Just borrow against the existing property and use this as deposit.