Mortgage Strategy 101 – Ep 12. How to keep property as you accumulate!
Hello and welcome to episode number 12 Mortgage Strategy 101. Today we’ll be taking you through one of the key components that helps you to hold property as you accumulate property into the future. In particular, why putting all your surplus repayments into an offset account on an existing home that you’d like to keep and turn into an investment property makes such a massive financial difference to your future wealth. And so we just illustrate that in really simple terms. So if you’ve borrowed $800,000 for your current home and you pay it down to $400,000. You think you’re doing a great job right, by paying down your loan so much but, unfortunately what you’re doing is you’re removing the ability for you to claim as much interest on that property should have become an investment property into the future. And therefore the financial benefit from keeping that property is diminished significantly. So in the case here if you’ve paid it down to $400,000, we’ve drawn the numbers out for you. So when it becomes an investment property, this $800,000, loan balance of an interest rate of 4.6% you’ve got the deductible interest of $36,000 versus on $400,000, you’ve only got the deductible interest of $18,000. If your tax rate is 37 cents in the dollar, so your income somewhere between around $80,000 and $180,000, the extra interest that you’re able to claim per annum is $6,660 differential. Now if you hold that property over twenty years that’s an extra $130,000 in tax deductions that you’re eligible, should you have put all your surplus repayments that extra $400,000 into an offset account rather than paying down the loan. So you can see how financially compelling that is to make a case for you keeping that property when you buy the future home if you’ve got all these extra tax deductions now this is a really great example and illustration of how your mortgage strategy needs to align with your long term property plan and to help you hold property because it’s not just the interest. Firstly the the benefit of putting this extra money to the offset account is not even measurable today it’s only measurable when the time comes to upgrade. Okay, and so no mortgage brokers basically or lenders will talk to you about this. So then when you buy that property the future home and if you’re able to claim the extra $6,000, that’s great. It looks fantastic because you’ve planned ahead but it’s really when it really compounds is the number of years into the future you hold that property for and it’s not only the extra interest that you’re saving it’s all the extra compound growth you’ve had on that property through being able to hold it over your lifetime. And from my experience one of the biggest killers of people’s wealth and the thing that people most often regret in their later life when we’re sitting down with them and providing them with financial and property advice is they wish they had a held property that they purchased. And I wasn’t aware of this mortgage strategy when I first purchased my first two properties which I sold and you know I wish I was because that’s probably cost me a million dollars AND counting already. So beyond that, there’s also another benefit that you’ve got this extra $400,000 in your offset they can go towards a future home. So if you’re going to pay $1.2 million for the future home you’ve got this $400,000 which means you only need a loan of around $800,000 versus a Purchase Price (PP) of $1.2m. Whereas if you paid down this loan you cannot redraw that money out to pay for the home and claim it as a tax deduction because you fail the purpose test and a lot of people don’t realize this they think they can just redraw the money out and pay for the home and still claim that because that loan was secured against the first home. And that fails the Australian Taxation Office’s case for the purpose test because what determines deductibility is what the money was spent on and that redraw would be spent on the home. So that’s why you need to move it into an offset account. So not only do you get greater tax deductions and have a better financial case for keeping the first home, as it becomes an investment property you also have less money that you’ll need to borrow because you put the money in the offset account to go towards a home. Whereas if you paid down, you don’t have the $400,000 in your offset, you have to borrow the whole $1.2 million workings in round numbers on the future home. So there you have it that is a key component of one about core top five strategies of holding property. I hope you’ve got something out of that, if you’d like to find out more about how to hold property as you accumulate property and it’s vital that you set up your loan structure from day one because it counts from day one, in terms of how much long-term benefit you’ll get from being able to keep the existing property. Have a look at episodes 8, 3 & 1 where we also cover some other aspects of how to hold property within your mortgage strategy. I’ve also written an article for domain on this and that article is called “How to turn your first home into an investment property when upgrading”, so you can find a link to the description below. So until next time have a wonderful day and please make the most of your opportunity to set up your mortgage strategy to create wealth for your future. Thanks very much!