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Paying off PPOR

Discussion in 'Investing Strategies' started by HHH, 29th Dec, 2005.

  1. HHH

    HHH Active Member

    Joined:
    5th Oct, 2005
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    Location:
    Queensland
    Hello everyone

    Hope you are all having a nice and safe Xmas / New Year....

    As I understand, Steve (and others) are big advocates of paying off your PPOR/Non Deductible debt ASAP. You can then redraw (or whatever) later for further investing, but this time the loan on the PPOR would be deductible.

    My question relates to offset accounts on your PPOR. Our current PPOR is definetly not our dream home and we plan on upgrading some time down the track. I always thought one advantage of using an offset account was so if you later changed/upgraded your PPOR, you can simply "transfer" the money from one offset to another therefore keeping the non deductible debt to a minimum if you have money in the offset account.

    How do these two scenarios work together??
    If you pay off your PPOR as Steve suggests, if you want to keep your PPOR as an IP and purchase another PPOR, you are back to square one, ie the loan on the new PPOR will not be deductible.

    If however you use an offset account, since the money is not actually used to pay off the loan, how do you leverage all that money sitting in an offset account for further investments?

    I hope my question make sense
     
  2. Simon

    Simon Well-Known Member

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    17th Sep, 2005
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    Location:
    Newcastle

    This is really one for the Financial Planner - but I will have a crack at it.

    As I understand your post you cannot use the offset funds whilst they are in offset.

    What I suggest in this case is to draw the loan up to 80%. Top it up as your valuation increases.

    These funds can be used to leverage into more IP or equities. You know the drill.

    As the valuation on the PPOR increases topup your loan to 80% or even higher if the payment of LMI is warranted.

    So if we use IP or fund income to pay into the offset and at the same time draw new funds against the PPOR for investment purposes you will soon enough replace the non deductible debt with deductible debt.

    When you move into your new PPOR the funds from the offset can be pulled out to purchase it and the total loan (against the exPPOR) will now be 100% deductible. The new debt against the PPOR (if any) will not be - so we start the exercise over.

    Major diadvantage is that the funds in offset aren't being used to gear into higher yielding investments. However the 7% they are saving you in before tax dollars has got to be worth something and is quite secure. Perhaps can be considered your cash holdings?

    How does my logic stack up?

    Cheers,
     
  3. HHH

    HHH Active Member

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    5th Oct, 2005
    Posts:
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    Location:
    Queensland
    Hi Simon

    I understand the concepts you are talking about, I guess in our situation, we are some time off from upgrading our PPOR. So ideally, as you mentioned, the best idea would be to refinance our current PPOR in stages and use for investments, slowly turning non deductible debt into deductible. I just don't like the idea of starting over when we eventually upgrade. At the same time, I don't like the idea of having all that money sitting in our offset account that could be better used/leveraged.

    There probably is no answer to this and maybe just a combination of both so we are not starting totally from scratch when we upgrade.

    Any other comments or ideas appreciated.
     
  4. Mark Laszczuk

    Mark Laszczuk Well-Known Member

    Joined:
    16th Aug, 2005
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    Location:
    Brisbane
    HHH,

    Assuming the cash in the offset account is the only cash you are holding, I strongly suggest you look at this money as your buffer. There's a good story relating to having a large buffer on Somersoft written by skater - scooch over there and have a read of it.

    Your buffer forms part of your overall insurance policy and is absolutely essential. Use the equity you currently have in your PPOR to purchase investments, but by all means don't put a loaded gun to your head by using the buffer to purchase said investments.

    I would go a little further here and say to you - do you have enough in the buffer? If not, then add some of the equity in your PPOR to it and invest the rest. In my personal view, the ideal buffer is - at the absolute minimum - 12 months 'expenses' and then some. For example, let's say your expenses for one year are $50,000. Expenses = investment holding costs, general living expenses, loans, etc.

    I personally would be aiming at a buffer of at least $60,000. Now, that's just me. Some people are comfortable with a much smaller buffer, others prefer even more than that. It's up to the person really. As long as you have at least something there.

    Just remember, the investment graveyard is full of people that said 'It won't happen to me.'

    Mark