SAVE $1,000’S WHEN BUYING PROPERTY
We see many silly things that people do, all things that could be avoided if they talked to an accountant before acting!
Here are 2 tips to get started:
1. Get an offset account!
An offset account is a separate transaction account that when it has available funds in it, the balance offsets your outstanding loan balance and therefore, reduces the interest payable on that loan.
Why are offset accounts important?
SCENARIO 1 - Lets say you have a property (either investment or home) and you have been paying down the loan over the past few years. You then want to buy a new property to live in and rent out your existing property. You think you can increase the loan on your current property to fund some of the purchase of your new property and since the loan is attached to your newly created investment property you think the interest is tax deductible.
The ATO looks at what the funds have been used for. Since they have been used for the purchase of your new property, which is your home, it is non-deductible debt.
SCENARIO 2 - Same situation as scenario 1 but instead of paying down the loan you put your excess cash in an offset. When you go to buy your new property you take the cash out of your offset account and use this to purchase your new property. The full loan on your current property is now tax deductible.
2. Interest only VS principal and interest
These two different types of loans will give you two vastly different results. Individuals who are lucky enough to have two properties, one home and one investment property, need to have two different types of loan.
Make your home a principal and interest loan. Pay this one down as fast as possible. Home loan is bad debt, meaning you can’t claim the interest on the loan.
Make your investment property an interest only loan. This will reduce your regular repayments on this loan to only an interest component. The extra principal that you would usually pay off this loan, put it to your home loan.