What to do with extra cash

As some of you know, I have recently purchased a IP, which I plan to make a PPOR in a couple years time.

Currently the interest payments are 2/3 of my wage, so once I move in, repayments will chew up a good chunk of my wage.

My question is what you would do.

a) use the next couple years to pay down as much of the loan as possible whilst rental income is coming in.

b) pay the min of loan and invest excess funds into equities and then in say 3 years time sell them down and pay down a portion of your loan to make it more manageable when I move in.

whats the most percent of my wage should I be paying towards a home loan once its a PPOR?

 

Hi Crc

This may be investment "heresy" but who says your PPOR loan has to be P&I?

If you maintain the discipline of investing excess above IO payments then you'll still have the asset growing for you. Whilst the home loan debt is not tax deductible, there's the stability of having "your own place". Some would say that's "priceless".

Just some food for thought.

cheers
N.

 

Hi Nigel, I have set up the loan IO. Currently it is tax deductable, as its a IP, but I plan to convert it to PPOR in 2-3 years time.

So my question is basically, should I use the next 2-3 years to pay down the loan, and dump as much in as I can each month, OR, invest the same money into a managed investment scheme.

If I had no intension to make the IP a PPOR, the answer would be simple, leave it and move onto the next investment, but since I'm hoping to make it a PPOR in a couple year, it make things some what different.

 

why not put it in an offset? each to own in this circumstance, but there is shares which have increased 50% in the past month (and no where not talking about species)

 

Hi crc,

If you know your stuff well enough, you could try for the best of both worlds.

Set up a 100% offset account against your IO (tax deductible) loan. Set up a regular savings 'plan' were the equivalent P&I payment is automatically transferred into the offset account.

Whilst the current equity market `volatility' remains, leave the money in the offset account `earning' a guaranteed 8%+. (Note that this system is also compounding!!! Each month that there is some money in the offset account a small amount of the `interest' part of the payment is saved and used to `reduce' the `principal' by adding to the amount in the offset account.)

When you are confident that you can do better in the equity markets then simply use the money in the offset account to make your purchases. If the market goes bad simply sell up and move the money back into the offset account.

You just have to be careful about CG tax and entry and exit costs, but these are dependent on your particular situation.

Tailcat

 

Married?
Do you have dependents?
Do you have life insurance, TPD?
Is your income safe if we go into a recession?
Do you have other income from investments?

Answer these questions and then we could probably help you more.

 

currently I plan to put as much as I can into redraw as I don't have a offset facility. Both work the same essentially, other than redraw I am forced to use the money for income producing activities! So this will save me from spending on gadgets.

 

I am single living at home.. I don't have any insurance as I don't have any dependants.

My income is as safe as any employment can be during recession!

At present I don't have any income from other investments. since I figure they would have to product 8%+ only to break even compared to placing money into redraw.

 

wow, what a mistake only getting a redraw loan... with the amount of products on the market why would you limit yourself to something which is out dated?? To late to switch your loan?

 

I didn't think its a mistake. The higher interest rate I would pay to get the facility is not worth it. I'm getting a variable rate of 8.21% PA without any monthly or annual fees.

If I went with say the CBA and got their wealth package it costs $300 per year, plus the rate still isn't as low as I'm getting now.

 

cost vs opportunitys...

8% guaranteed & screw up loan deductability vs 8% guaranteed and not screw up deductibilty...

its a 6 basis point difference, so effectively it becomes $510 (on a 300k loan) (17 basis points once you include the wealth fee but youll get the benefits then like credit card, insurance etc). Enjoy the increased accountants bill when you have to seperate costs.

 

normally the wealth pack gives you .4 discount, however at present its .7 discount as a special.. do you know if the .7 discount is for the life of the loan?

 

ok, I have decided to go with CBA, and get the offset account!

They will fix my rate at 8.5% for 10 years interest only, which is better than what I got before, fixed only 5 years. 5 years will come and go quickly. 10 years is piece of mind. I'm fixing 84% of my loan so I will have some room to use the offset account.

plus I can pay interest in advance, and get discount 25 pts on my margin loan..

plus it will be easier to manage from one location.. ie netbank.

they gave me the 70 pts discount on the variable component as well for the life of the loan.

 

Forgot to ask another question. What are your financial goals?

 

my goals to create a residual income of $50k PA with house loan paid off (or repayments) covered by income.

If I achieved $500,000 in a unlisted property trust (net of debt) and got cash 8.5% yield, that would be a great out come.

My question is do I pay down the loan first, or invest into shares/funds instead.