When to pay off a loan?

If you had a loan and it was completely offsetted, you probably won't want to pay it off just yet as it gives you more cash to play with and if in the event you need to tap into the savings, the difference will become tax deductible.

But, what if you are taking out another brand new loan. Is there any reason to not pay off the initial one and focus all the offsetting on the new loan? The only benefit i can see for keeping the first loan is the availability of more cash. Is there anything else?

 

Yes

If ownership of each property is different there would be different outcomes.

Interest rates may be different


Serviceability may be restricted so paying off one may be needed. The one with the shorter term may be best to pay off in this instance.

 

Is this for a home or an investment property?

If it's a home and you have funds in the offset, it makes sense to get rid of the non deductible debt and 'reborrow' so the cash becomes deductible and therefore can enable investment property purchases.

Good risk mitigation strategy to hold on to some for future personal expenses however.

 

Thanks, both are investment.

The first one has a 0.2percent better interest rate.

Also serviceability is not an issue for the second loan. Maybe for the third but that's in the future. In the meantime is it better to hold on to both loans for now?

 

Then it doesn't make sense to pay it off

How much is that annualised ? How much extra repayments ? What about the tax benefit - what's the net loss after that ?

 

I would not pay off a loan unnecessarily but wait and see how serviceability is for the 3rd one.
can you offset the one with the higher rate?

 

Thanks all. When the bank does serviceability assessment, does your account like it does for credit checks?

 

I am not sure I understand, but serviceability is just a calculation and there are no credit hits - unless you actually lodge an application.

 

I thought the Bank won't tell you your serviceability until you lodge the application?

I tell you why i'm asking. If keeping both loans will affect my serviceability, then before I do the third property, I probably should close off the first loan before applying. Otherwise, the report may come back saying my serviceability is poor.... then i go and close off the first loan... but then the history will indicate I have one poor outcome previously.

 

Your broker should advise of the same upfront without having to lodge an application

 

That's why you use an investment focussed broker who can run the calculations with the lenders internal calculators that we have access to - so we can determine that you'll actually meet the criteria/servicing before lodgement. No point just spinning the wheel to see how it goes.

 

You really need to get a good finance broker. They can help you with a lot of questions like thus and also help you optimise your loan structures and maximise your serviceability. They can tell you how much you can borrow before you even apply for a loan.

 

Also thinking about the 3rd property in time some considerations:

1. Are you going to use offsetted funds to purchase it?
2. If yes, will it be under the same entity name as where the offset funds are coming from?
3. Decision needs to be made as to what you want the debt applied against if funds taken from offset?
3a. Take cash and use to buy IP 3 - debt still against IP 2
3b. Offset funds paid into IP2, redrawn and used for IP3, thus borrowings applied to IP3
3c. Combination of 3b..

Need to consider cross coll as well.

Some planning now I guess is what I'm getting at..

 

Ok thanks, will get a broker for the next one definitely

For the next one just so I do it in the correct sequence. Do I get a broker first before engaging the bank, does the broker engage the bank on my behalf?

 

Yes, you get a good broker first.

 

You work 100% with the broker, they do everything for you - deal with the bank etc.