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Pay off house or Business Debt!

Discussion in 'Money Management' started by Triu, 19th Apr, 2007.

  1. Triu

    Triu Well-Known Member

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    WA
    Hi anyone give me their opinion if your a business owner and house owner!

    I don't want to pay off my home loan yet as i want to turn it into a IP later on in the future, But i may purchase a business with a debt against my PPOR and was wondering should i pay off my home loan or pay off the business loan first.

    What do you think anyone? all ideas will be accepted!

    thanks
     
  2. Simon

    Simon Well-Known Member

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    Newcastle
    Pay it all into an offset account against the home loan.

    When it becomes an IP just draw the money to use for a new home or anything and the full debt is preserved.

    Whilst you have this home (with offset) then consider not paying down any deductible debt - esp business or IP debt.

    Cheers,
     
  3. Triu

    Triu Well-Known Member

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    Thanks Simon

    Can you please tell me how the offset account works is it similar to a LOC?
     
  4. Simon

    Simon Well-Known Member

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    An offset is an account you store money in - like a savings or cheque account.

    But this one doesn't pay interest. What it does do is offset the interest charged on your loan.

    ie a loan of $200K has an offset of $50K. You only pay interest on $150K.

    The offset funds are never in the loan account so you can deposit and withdraw money at will and your loan balance is unaffected.

    This is about the best form of loan in nearly all cases. It provides tax advantages and flexibility.
     
  5. MiddleClassMonkey

    MiddleClassMonkey Well-Known Member

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    Simon, if you pay down your home and setup a LOC on the equity, isn't it the same thing?

    I thought given you use the funds for investment purposes, you still preserve tax deductibility?

    - MiddleClassMonkey
     
  6. Simon

    Simon Well-Known Member

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    It is similar in that if you draw the money for investment you preserve the deductibility.

    But here is the kicker - if you make the PPOR an IP where do you live? Usually people make the PPOR an IP as they have upgraded their PPOR. So drawing on the LOC for a new PPOR means no deduction on the LOC. Drawing the money from the offset means your original PPOR loan (NOW ip) becomes deductible.

    this is a big thing as using the LOC as you described will leave you with a big non deductible PPOR debt and no deductible IP debt.

    If you do wish to draw on the offset for further investing then you can switch the offset funds into the PPOR and then redraw (or LOC) them for the investment.

    Hope this all makes sense.

    Lastly why not use the offset and establish an LOC for investing. as the equity in the home rises you can increase the LOC. Use the LOC to start a margin loan and then double the funds before investing or use the LOC as a 20% deposit on another IP.

    How does that sound?

    Middleclassmonkey - I reckon you now know heaps more about investing than you did a week or two back :) :)