Where to keep money?

I am new to this forum, I am also fairly new to the world of investment propertys.

I bought my first property in January 2015 at the age of 20, I resided in it as my primary place of residence until July 2017.

I then moved into another property (cheap rental) and leased out my first home. I am now saving up for a deposit on another property, I have not yet decided if this second property would be used as an investment or for me to live in.

At the moment, every spare bit of savings I have I simply transfer to my home loan account to reduce the interest on it. This home loan account has redraw facility and I can simply move money in or out of it without fees or any issues. I am currently $10,000 ahead on repayments which leaves a balance of roughly $286,000. I keep a small float of a few thousand dollars in my savings account for everyday spending.

I have recently discovered that this method of storing savings could have tax implications for me, my plan was to save about $40,000 or so and keep it in my home loan until I am ready to purchase another property then draw the $40,000 out to use as a deposit.

Little more info, my savings account is not an ‘off-set account’ and my home loan is principal and interest.

My questions are;

Is this plan good? What are the pro’s and con’s?

Where should I keep my savings instead?

What is the best way for me to continue?

 

It sounds like you may have inadvertantly cause yourself a bit of a headache.

Have you been drawing in and out of the loan to date for personal use stuff? If you have, you may not be able to claim all of the interest on your loan. If you've just been storing funds in the loan it's not as much of an issue, and easy enough to restructure but still not ideal from a strategic/cost saving/wealth creation perspective.

 

Since I’ve had the loan I have used it as an account to store excess funds. I have also withdrawn funds from it for personal purchases over the last couple of years. Should I pull the redraw amount out of it now and not touch the loan account again?

 

You transfer spare cash into the attached redraw account?

 

I transfer any savings I have into the loan account.

 

Get an offset account set up against your loan. You've already created a problem with the first $10k and brought the deductibility of the loan into question. You probably shouldn't make the problem worse by adding another $40k to it.

Get an offset account set up for the $40k. If your lender doesn't offer an offset account, consider moving and get some decent advice in the process.

 

Yep, the old redraw instead of offset chestnut. If your next purchase is an IP it is less of an issue, just split off the 40 K and use it as your deposit.

If your next purchase is a PPOR that is not desirable as you forego the interest deductions on the $10 K. Fairly easy to fix given the amount is not huge. need to set up an offset account now and start recycling the $10k using it to pay for IP expenses. look at Terry W‘s tax tips or seek tax advice to make sure you do It properly.

 

I'd suggest chatting with someone to determine the best course of action. Your accountant would likely be a good start - they should be able to let you know how much will remain deductible, and you can split the loan from there.

 

Really good advice already on this thread.

Start with seeking advice from your accountant, and if you don't have one, engage one.

As a second step, look to restructure the loan, ensuring you fix any issues as per accountant's advice, and working with a broker who is able to implement this for you, and has an understanding of the issues at hand.

Also, set up an offset account where you can build up future savings, so you don't mix it with your tax deductible loan.

 

A couple things you need to do ASAP:

• Switch the loan to a product with the lender which will allow you access to an offset account so you can store future savings in this account.
• If you cannot switch the loan without significant cost/having to switch lenders AND you paid LMI, it might be best to just save the funds in a high interest saving account - the net savings difference is marginal compared to the potentially switching costs in some scenarios
• speak with your accountant to determine how to treat the depositing/redrawing of funds for personal use previously which would have contaminated the loan
• Build a relationship with an investment focused mortgage broker who will make sure you don't make this mistake to begin with next time

Don't worry, it's not the end of the world. The accountant will be able to tidy it up and you'll still be able to achieve your long term plans - you just learnt a lesson which will bear a cost to fix.

 

Good advice from Jess. I would add to team up with a broker first to cross reference the accountant's advice as some speak a load of **** based on gross assumptions.

 

This is very true - some have zero idea about this despite having the required credentials to advise on it. I've come across some shockers.

 

wow so much good advice above, I am sure you will be on right track @Perthinvestor94,

and pls do ask questions if you have more questions.

 

Well done on starting early.

Also don’t forget you need a valuation for property 1 at July 2017 for CGT purposes. That value should be your cost base (based on limited info provided) when you converted it from PPOR (appears to be on surface) to an IP.
If you haven’t, it would be easier to get a value now than in 10-20 years time.
Check Terry’s tax tips.

 

Are you holding the first property for sentimental reasons as your first home or is it a good long term hold? Do you intend to hold it long term?
Just throwing it out there - is it a reasonable time to sell it? This hasn't been discussed.

 

I would lose money if i sold it now. Nothing sentimental about it, just holding it until market picks up.

 

I wouldn't have thought that is a good enough reason in itself to hold onto it. Sometimes its better to just take the loss and move on.

Surely its taking up valuable borrowing capacity, if not cashflow as well?