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Pay of PPOR or Fix term deposit

Discussion in 'General Investing Discussion' started by glennt, 12th Oct, 2012.

  1. glennt

    glennt Member

    Joined:
    24th Jul, 2009
    Posts:
    13
    Location:
    Adelaide
    I recently received $54,000 from my parents will. I was wondering how I can best make use of the money whether to pay of my PPOR owe $246,900 at current interest rate of 5.57% or put the money into an savings account that pays a high interest of 5.75% and just keep rolling it over ?
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
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    4,619
    Location:
    Sydney, Australia
    Don't forget that you pay tax on the interest earned in a savings account, but you pay no tax on interest saved by paying down your PPOR.

    What's more, you are paying the interest using after-tax dollars, meaning you need to earn around 30% - 40% more (depending on your tax bracket) to use that money.

    Put another way:

    After 12 months @ 5.75% interest, you will have earned $3,105 in interest (assuming you don't reinvest the interest). If you are in a 37% tax bracket, you'll pay $1,148.85 in tax on that interest, leaving you with a net return of $1,956.15

    Alternatively, after 12 months of not paying 5.57% interest on the money paid off your PPOR, you will have saved $3,007.80 in interest. However, if you hadn't paid down the loan, the $3,007.80 in extra interest would have been paid using after-tax dollars, which means (assuming the same 37% tax bracket), you would have had to earn $4,773.02 before tax to pay this off.

    So saving the money returns far less after tax than paying down your PPOR loan does!

    Just be cautious - if you do choose to pay down your loan, check to see whether you can get a redraw facility on the loan in case you decide to borrow against the equity in your home for investment purposes. Even better, investigate putting the monet into an offset account rather than paying down the loan - gives the same result but possibly with more flexibility.
     
  3. glennt

    glennt Member

    Joined:
    24th Jul, 2009
    Posts:
    13
    Location:
    Adelaide
    Sim Thanks for your reply

    Sim I am most appreciative for taking the time to explain in detail. ;)