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Debt recycling with a P&I loan

Discussion in 'Accounting, Tax & Legal' started by goponcho, 12th Dec, 2019.

  1. goponcho

    goponcho Active Member

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    Hi guys,

    Trying to decide between if using a P&I loan is better, as it 1% cheaper than IO. However, we will end up paying down some of the loan and so our deductible loan will reduce in size. I am trying to work out a way of using a P&I while maximising our deductible debt.

    Say we had a $1,000,000 owner occupied home loan that we wanted to debt recycle.
    We then split into say $100,000 split using a P&I loan at 3%, pay this down, then redraw it out to buy income producing shares.

    1) My question was with whether we can continue to redraw any amount paid down into this P&I loan??
    Say for example, after 5 years due to our repayments, we have paid down our loan to $90,0000 so have $10,000 in equity. Can we merely redraw the extra $10,000 and use this to invest? And then our deductible component will return to $100,000 in order to maximise our deductible debt?

    2) How frequently can we redraw our equity? Theoretically can we pull it out every month as we pay our interest repayment, so technically keeping the loan always at 100% of original loan??


    Thanks!!
     
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  2. goponcho

    goponcho Active Member

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    All good worked it out!!
    Using an interest rate calculator found over 5 years prior to refinancing, approx 10% of the loan is paid down in a P&I loan of 30 years.

    So looked at two options to simplify things with estimated interest costs on $100,000:
    1. Interest cost IO (IO, 100% deductible loan @ 4.13% @ 39% marginal tax rate) = $100,000*4.13%*61%=2519$
    2. Interest cost P&I (P&I, 90% deductible loan @ 3.13% @ 39% marginal tax rate) = $90,000*3.13%*61%+$10,000*3.13% = $2031

    So P&I at these rates superior, plus might be able to use some of the paid down equity in the interim to increase our deductible loan further.

    Thanks me!
     
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  3. twisted strategies

    twisted strategies Well-Known Member

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    good one !!

    this was well outside my skill levels so i wasn't going to be any help , sorry

    may everything go well

    cheers
     
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  4. Hodor

    Hodor Well-Known Member

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    It should be obvious you are paying less interest with a lower interest rate. P&I vs IO in this type of scenario is a question of cash flow as the principle repayments increase your repayment.

    Depends on the conditions of your loan etc, you can possibly re-borrow the repayments.
    Getting a loan to reduce tax shouldn't be your primary motivation, you are getting a deduction because you are losing money - although the investor is trying to get returns in excess of the borrow costs.
     
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  5. goponcho

    goponcho Active Member

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    Thanks for the reply, it's just a standard re-draw loan. Hopefully as default you can, will ask bank manager later on.

    Good point about the repayment amount being higher with the P&I too for cashflow concerns. Not constrained by cashflow currently so didnt mention it.

    Our primary motivation is to increase equities exposure aiming for a positive expectation, however debt recycling minimises the incidental costs such as interest. Not just for the deductions as sometimes people do:eek:
     
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  6. Terryw

    Terryw Well-Known Member

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  7. Terryw

    Terryw Well-Known Member

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    upload_2019-12-17_12-33-40.png
     
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  8. Terryw

    Terryw Well-Known Member

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    Had some formatting issues
    1. No as the loan will amortise over 30 years to the 'limit' will constantly decreasing over time. Th above diagram will show how much would be available for redraw

    2. No limit. You could potentially do it daily.
    One trap though is some lenders do not allow immediate redraw. If you deposit into the loan you will only be able to get the money out after the next monthly repayment.
     
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  9. Terryw

    Terryw Well-Known Member

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  10. goponcho

    goponcho Active Member

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    Hi Terry, not sure what you axes represent?
    But so slowly at first, and faster later the limit that we can redraw declines?
    Not too much of a decline in limit, if we have to refinance after 5 years i think.
     
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  11. goponcho

    goponcho Active Member

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    Sorry, just read your post linked above on pchat, clear now :) Thanks!
     
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  12. Terryw

    Terryw Well-Known Member

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    Time on the bottom one and outstanding loan on the side one.

    This sort of graph would apply for someone keeping some extra cash in the offset account and/or paying a bit extra per week into the loan.
     
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