The Money Mustache Community
Around the World => Australia Discussion => Topic started by: CompoundingRocks on November 26, 2020, 07:49:15 PM
-
Hey Mustachians
Been battling with this one and would like your thoughts from smart minds.
Wife and I have an investment property loan (50/50 ownership) where the cash savings go into an offset to minimize interest)
A the moment our savings have equalled the loan amount.
I'm wondering whether if it's smarter to take some savings out of the offset loan account and put into another better returning financial instrument.
All I have read are recommendations of index funds.
My thinking is that since I'm paying tax, why not pull some cash out of the investment loan - and pay interest
The interest payments I have to make will be used as a deduction to reduce the tax I have to pay.
So example for simplicity sake;
investment loan $100k
interest rate at 4%
cash savings $100k
I have to pay $15k in tax each year
Wife stay at home mum with some rental income from the investment property.
Q1 Where this thinking flawed?
If so, what do you suggest if you were in my shoes?
Q2 what other "passive" investments should we consider aside from index funds to research more?
Hope I'm making sense. Really appreciate smarter minds on this
Thanks so much for your thoughts.
CR
-
Presumably the investments you make with the cash will also generate an income, so it’s unlikely you will be ahead tax wise, but you might be ahead profit wise.
Hard to give advice when we don’t know the rest of your circumstances. Other property, kids, ages, super, etc etc.
-
My way of saying it is you have 'paid off' your investment property and so are ready to do some further investment.
Is an index fund your best next investment? Or is Another property, or Super, better for your circumstances?
I'm FIREd and own my home, so an index fund was good for me, but if I was younger and still working I would lean towards another good property.
-
If you pull the money out of the investment property offset you will be increasing the interest payments which will mean each owner has larger deductions and then less taxable income.
Those funds could be used to invest in the wife's name so she could then earn and income, without interest incurred, and that income would benefit from her lower tax rate.
So you are shifting income from yourself to the wife to an extend and this has a tax advantage as well.
I think it is generally a good strategy.
-
Hi CR,
The maths will tell you which is more efficient, but only in the option where you use your savings to pay off mortgage (1) are your variables known (interest and tax rate).
For the investing option (2) you are using a theoretical capital and dividend number that may or may not be produced by whichever index fund you choose.
The other variable for either option is your psychological will power to see through the options. If you choose option 1 then buckle and sell in a crash you still have a mortgage and now much less savings. If you chose option 2 and close the mortgage then dollar cost average future savings into index fund, you are less likely to end up in the sink if you panic and sell as you own the house outright.
Another way to think of it is: consider you had no savings in cash, the bank calls and tells you for whatever reason your mortgage is now paid and closed and you own the house outright. Would you go the another bank, loan an offset mortgage against that house and invest that money in an index fund?
Not sure if that helps or hinders sorry.
Cheers
Murdoch