What to do when paid off loans

Discussion in 'Investment Strategy' started by Matt87, 18th Aug, 2019.

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  1. Matt87

    Matt87 Well-Known Member

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    Thinking for future:

    When all loans are paid off , what next?

    Do you borrow equity and invest in shares?

    Live off the passive income?

    Is it better to have debt for tax deductible purposes?

    Matt
     
  2. Rugrat

    Rugrat Well-Known Member

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    Depends on your overall goals, your personal financial situation and what stage in life you are in.

    Personally, my goal has always been geared towards generation enough passive income to live off / retire off, with no debt left by the retirement stage.
    Not there yet, still another 20 or so years until we hit retirement age. But we are limited in how much debt we can accumulate (serviceability issues),so we work on a cycle of acquiring good debt, and then paying it down / off.And then acquiring more and doing the same thing. Its a long term strategy, that allows us a good lifestyle in the meantime, but still gets us toqards our goals in the end. Our goals have never been to 'get rich'. Its always been to provide a comfortable lifestyle now and maintain that lifestyle into retirement.
    The tax deductibility has been very beneficial at various points along our journey. But at other points the debt has been more of a hindrance (especially with serviceability) and so we have done better to do away with it at those points. The key is flexibility and adapting your strategy to fit the circumstances of the time. Never lose sight of that end goal, and chance your approach as you need based on the more current circumstances.
     
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  3. Terry_w

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

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    Perhaps best not to pay off loans. See my latest tax tip
     
  4. kierank

    kierank Well-Known Member

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    I don’t think we will ever have all of our loans paid off :eek:.

    Last month, we refinanced a $1M loan and it has a term of 25 years. We are both 63, so we will be 88 when that term expires.

    My thoughts are:
    • People “lend” their cash to the banks and they earn say 1%pa. Some might even have to pay tax on that income or it might reduce their pension.
    • The banks lend it to people like me and they earn say 4%pa.
    • I invest it and earn say 8+%pa. With the right approach, that return can be tax-free.
    I don’t understand why would people would ever want to be debt free, especially good debt.
    I like I/O investment loans with Offset accounts. They allow me to manipulate how much tax (if any) we have to pay.
     
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  5. cberg86

    cberg86 Active Member

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    Can I ask how you achieve a return that is tax free with I/O loans & offsets?
    I'm very interested in learning how others structure their purchases :)
     
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  6. The Y-man

    The Y-man Moderator Staff Member

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    Borrow more so you can have the joy of paying off again :D

    The Y-man
     
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  7. devank

    devank Well-Known Member

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    Life without a mortgage would be boring :)
     
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  8. fuzzylogic99

    fuzzylogic99 Member

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    I don't think we'll ever pay off our loans, but we're aiming to have our properties positively geared so that one of us don't have to work full time, and start winding off work if we want to. You could either move towards income producing assets like shares or commercial properties, and have a manageable amount of debt.
     
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  9. ToBeFree25

    ToBeFree25 Active Member

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    How much is passive income is enough for you ? Will determine whether you need to pay off your loan.
    Ps: answer is never enough..
     
  10. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Both of these are a very very personal thing........... and what works well for one, will give another Heartburn.

    Risk profiling helps, but education and "peeling the onion", and risk mitigation are probably more powerful I feel.

    ta
    rolf
     
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  11. kierank

    kierank Well-Known Member

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    Investment return has two components, namely capital gain and income. Each component is taxable but every investor has control over how much tax they pay. That is, they can employ structures, strategies, timing, etc to reduce (not evade) how much tax they need to pay.

    For capital gain, it is tax free until one sells. So, if one never sell, it is always tax free for you. If one uses a trust, one can delay a sale for the life of the trust (typically up to 80 years). The gain is tax free for you and the trust beneficiaries for that time.

    For income, there are many strategies for reducing the tax one must pay. If one utilises enough strategies, one can reduce their income below their lowest threshold and hence pay no tax. As stated above, I like I/O loans with Offsets. For example, say one has a $300,000 I/O investment loan at 4% with an Offset.

    If the Offset is empty, $12,000 is charged as interest and is tax deductible. In other words, one's taxable income is reduced by the $12,000.

    If the Offset is fully chocked, no interest is charged and one's taxable income is not reduced.

    If the fully chocked Offset contains only personal funds, one has the ability to withdraw funds, increase the interest charged and reduce their taxable income by an amount between $0 to $12,000.

    One could withdraw $25,000 for a major celebration (eg one of your children's wedding, one's silver wedding anniversary), or $50,000 for a new car, or $50,000 for major overseas holiday, or $100,000 for renovation/extension on one's PPOR, and so on.

    I particularly like to withdraw say $100,000 for a renovation/extension of an IP. Not only is the interest charged tax deductible, one get the additional benefit of depreciation (a non-cash expense) on the renovation/extension. Hopefully, the property has increased at least $100,000 in value as well.

    Imagine the flexibility if one had a $1M I/O investment loan with an Offset fully chocked with personal funds :eek:. That would be $40,000 worth of flexibility.

    I trust that helps. Not advice.
     
    Last edited: 18th Aug, 2019
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  12. kierank

    kierank Well-Known Member

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    Totally agree.

    Bit like driving a Ferrari at super-high speed. It is not for everyone. For some, it will be exhilarating; for others, it could be life-ending.

    Totally agree.

    Like most/all things in life, people get into (big) trouble when they go beyond their knowledge, beyond their skill levels, beyond their capabilities, beyond their experience, ...

    These things take time to obtain.
     
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  13. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    There’s a lot of options OP - and as mentioned above it can be a very personal thing linked to your tolerance to risk.

    Some people don’t mind leveraging against their properties - releasing equity to purchase additional investments while others may prefer to fund them using the surplus savings they now have since all debt has been paid off.

    Cheers

    Jamie
     
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  14. spludgey

    spludgey Well-Known Member

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    If my mortgages were magically all paid off, I'd do the following:
    • Go down to three days a week at work
    • Buy a commerical IP that's cashflow neutral (or better), after principal repayments and tax
    • Develop my Central Coast properties and build zero energy townhouses
     
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  15. cberg86

    cberg86 Active Member

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    Sorry for the late reply but thank you very much! I love reading posts that have a lot of time and detail put into them on the nuts and bolts of this stuff. I'm learning so much from this forum, such a great resource. Thanks again.
     
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  16. BuyersAgent

    BuyersAgent Well-Known Member Business Member

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    As fun as the more advanced debt/trust/tax free fancy stuff mentioned above is (I am not against these things at all and dabble myself) below are my notes for what I have observed being at the lower risk/boring answer to your question.

    By volume the majority of self funded retirees I know who were small but successful property investors enter retirement with their home paid off plus several properties fully paid off - they receive the rental income from the properties once debt is gone.

    They often also have a portfolio of shares. They sometimes also have some kind of fixed income or yield investment (pension, bond, defined benefit etc).

    Here is the trend I have observed. After 5-10 yrs of retirment, as they age from 70-80+ I see them gradually selling direct low yield property because they get less interested in dealing with tenants and maintenance and the passive income performance becomes their focus. The ones with high yielding property - they seem to keep those and they love the rent each week. The low yield capital city properties lose their lustre and get sold at some point unless a person has a passion to hand it down to the kids.

    I also see them selling speculative growth shares and using the funds from property sales and other investment sales being consolidated to passive income generation.

    They seem to then buy income/dividend shares or fixed income products. They all seem to talk about the magic 5%. They all want 5% return. Whether they can get that with the risk they are willing to tolerate is another question and it becomes the focus of their investing. The older they are the less risk they want, the less work they want and the more they are willing to just stick things in the bank on a few % and start spending capital. They want liquidity to pay for the nursing home at that point so property starts to become a bit of a liability unless they have enough ready cash.

    This is not my advice just what I have heard from asking lots of 70-80+ yr olds how their investments are changing and listening to the responses. I figure people are mostly similar so who knows maybe we will all go on this journey one day.
     
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