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ARCHIVED INVESTOR
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Interest-only versus offset/all-in-one
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 l'm thinking of buying my first investment property. I have only just started working full-time following the completion of my uni degree and have decided to spend about $300,000.
This will buy me a small apartment/ unit somewhere in the inner city. I've heard that apartments have higher rental returns but less capital appreciation than a house and land.
This suits me for now, as I want to be positively geared or as close to it as possible. As I'm not in the highest tax bracket, negative gearing doesn't appeal to me. My question is, would you recommend an interest-only loan, or an all-in-one loan where my salary is paid into my account.
I still live at home, have few bills to pay and the prospect of paying all my salary into my account appeals to me, as I know I will have plenty of cash left over. Please advise.
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 The answer to your question really depends on what you're trying to achieve. If you're looking at maximising the tax benefits of property investment you may want to consider taking an interest-only loan, as only the interest portion of your payment is tax deductible.
If, however, your long-term goal is to pay down the mortgage in order to 'gear up' and use the equity to purchase another property, you may want to consider either a 100% offset account or an all-in-one loan.
Both of these facilities allow you to have your salary and savings offset the debt, which will assist in reducing the debt more quickly. In either case you should speak to a relevantly qualified professional, such as an accountant for your tax planning purposes and/or a qualified mortgage broker or lender representative to assist you in obtaining a suitable loan product.
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Living Abroad - Can I Invest
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I bought a house in Queensland and received the first home owner's grant. I am currently living in it; however, I would like to start renting it out to students after six months.
I am planning to fully furnish it, however I am not sure whether I would be able to claim those expenses on tax. Would I need to convert it into an investment property and what is involved in doing so?
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With regards to the first home owners grant, if your house has been your principal place of residence for at least six months, there is no requirement to refund the $7,000 First Home Owners Grant.
Simon Tennent, executive director of housing and economics for the Housing Industry Association, advises homeowners to inform their bank and insurers about the new arrangements when converting their home from their place of residence to an investment property. "From a tax point of view, you will need to declare all income from rent in your next tax return; however you are entitled to some deductions," says Tennent. "Even though the purchase of furniture is not tax deductible, as a home owner, you will be allowed to claim depreciation on these items along with the fixtures and fittings within your home." "You may need to pay land tax on the home, however this is tax deductible along with council rates, utilities charges, repairs, property management fees, insurance and interest on your loan are fully tax deductible," adds Tennent.
From YMM February 2007
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Coming Home
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I’ll try to be brief, currently overseas….returning home in 2 months. Have 2 properties purchased as investment properties with the intention of moving into one of the homes upon return. Number 1 home is 95% mortgage free… the second carries a current mortgage of approximate of 400 thousand. We have a drawback availability of 100 thousand needed primary for resettlement…..furniture…auto etc. Should we pay off the rental property number 1….using the rent it provides to assist with the refinance the rental home number 1 on an interest only basis…hope the question is not too muddled….really need some clear advise…thanks
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From your email I understand that you currently hold 2 investment properties here in Australia.
Property 1
- The outstanding loan balance on this mortgage represents
approximately 5% of the estimated value.
- There is a redraw facility available of approximately $100,000 which
you intend using for resettlement purposes. I have assumed that this
redraw is available under the Property 1 mortgage. Interest on the
amount drawn for resettlement will not be tax deductible regardless
of whether the property securing it is investment or owner-occupied
because the loan purpose is personal (furniture etc)
- The mortgage is currently principal and interest (P+I)
Property 2
- The outstanding loan balance mortgage is $400,000.
- The mortgage is currently principal and interest (P+I)
- I am assuming that the $400,000 was originally borrowed to purchase
If I have read your email correctly you intend moving into Property 2 on
your return to Australia. If this is the case, then immediately you owner
-occupy the property the interest payments on the $400,000 will no longer
be tax deductible.
I am not a financial advisor,but in my view you will achieve a better tax
result if you:
- Move in to Property 1 (if this is a realistic and practical option for you)
on your return because only nominal amount of debt remaining on this.
- Refinance the loan on Property 1 and put in place an interest only
Line of Credit which allows you the option of capitalising interest.
- Leave the mortgage on Property 2 with the existing lender (assuming
it is well featured, competitively priced)
- Apply as much of your income as possible to repay the mortgage on
property 2 as fast as possible.
- Move in to property 2 once the loan is reduced or paid out.
In this scenario the interest on the $400,000 is tax deductible - there would
probably be some negative gearing benefits ( I'm not sure of rental income
figures so cannot quantify)
If moving in to Property 1 on your return is not an option then as noted
above once you occupy Property 2 the interest on the $400,000 plus the
interest on the $100,000 "resettlement" borrowings will not be deductible.
This means that you will be paying around $37,500 p.a.
($500,000 x 7.50%p.a) from after tax dollars to service your personal debt.
If you must move in to Property 2, then it might be worthwhile considering
- selling Property 1 (again I am unsure of capital gains tax,
potential growth, good investment to hold? etc)
- repaying the small outstanding loan amount on Property 1
- using the balance of the sale proceeds to reduce or pay out all
personal debt (resettlement loan and as much of $400,000 as possible)
- reborrowing $400,000 against Property 2 for the purpose of a new
investment. Interest on the new investment loan would be tax
deductible.
If you are keen to hold on to and continue renting Property 1, then as you
suggest, you should convert the existing loan on Property 1 to an interest
only capitalising line of credit so that you can apply as much of your income
as possible to repaying the non-deductible home / resettlement debt.I hope
this is of some assistance to you. If you would like some further information
or want to give me some more detail on the existing situation then I would
be happy to see what options / facilities might suit your needs.
The info I would need is as follows:
- location and value of properties
- amount of each mortgage, interest rate, fixed or variable?
- actual outstanding loan balance of each mortgage
- do you have any savings
- what is your likely income when you return to Australia
- do you have any other debt?
From YMM February 2007
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