Hi, Not sure what to do. My husband and I have four investment properties on interest only loans. I also have around 160K in a fixed term deposit which I pay an awful lot of interest on at tax time. Should we use that money to pay off one of the properties? Would I then be in a position where the rent from that property would become income and I would have to pay tax on that anyway???
Is there the possibility to add an offset account to one of your loans? The best value for money is putting your cash into an offset account - that way you are saving more interest from the loan than you were earning from the term deposit. There is an added benefit in that you can take the money out of the offset account for any reason (even personal use) without affecting the deductibility of the interest on the investment loans. This is generally preferable to paying off the loans, if possible - gives you far more flexibility for essentially the same financial benefit. You'd only pay tax if the net income from all properties was positive - but even if it were, I'd much rather pay tax on a profit than get a partial refund on a loss. As someone very wealthy once said - nobody ever went broke making a profit.
Thanks for the quick reply. Do I need to wait till the loan comes up for refinancing or can you set up an offset account at any time?
It depends on the loan you have now and how the lender structures their products. You should contact your lender and ask them if you can add a 100% offset account to any of your loans - sometimes it is simply an option that needs to be turned on, but other times it might require a refinance application. You won't know unless you ask. Double check fees and interest rates on the loan facility with offset account - some lenders charge more for them (which they really shouldn't).
Emtone, You are in a good position where you are making money to pay tax on. Without knowing more of your circumstances, it is difficult to give guidance. Moving funds from a term deposit to an offset (presumably on one of the investment properties) will not make much difference to your tax position. It will only benefit you in terms of relative interest rate differentials between the two. If you have any non deductible debt, then pay it down or use an offset against that first. It depends on your long term goals, your age, how long you will continue to work etc. as to whether it is better to leave it in an offset or pay down debt. At a point in time, investors should pay down debt, when is the question and that should be when their property portfolio is sufficient for their long term retirement needs. You may be in a position where adding another investment property could help your tax position if negatively geared. Good luck with your investments. Greg
