A mortgage is one of the single largest debts in our lifetime. Mortgage Strategy is vital to our property success and how we structure our mortgages can allow us to optimise future tax deductions, minimise debt on a future home when we upgrade, ultimately empowering us to hold existing properties as we accumulate new ones.
One of the great misnomers that was taught to us when we were growing up is to pay down the home loan as rapidly as possible! Before the shock sets in and you stop reading and start cursing me for making such a silly suggestion, let me explain! 😊
We are absolute believers in paying down debt as fast as possible, just doing it via a ‘repayment’ or ‘Grow’ offset account, as we like to call it, that you do not touch or have ATM access to.
Creating this Chinese wall between your additional funds that ‘Grow’ in an offset savings account from your loan in lieu of paying it down is critical.
If this cash pays down the loan account rather than grows your savings, you cannot redraw those same funds from the loan to pay for the future home and claim them as a deduction.
If you do not do this and claim the interest, you will fall foul of the ATO purpose test.
This approach ensures that you are maintaining the loan balance which means you can claim more interest into the future.
(As a side note – This is almost certain to be relevant, whether or not negative gearing is abolished, as cash flow losses that accrue will be carried forward to offset once the property is positively geared – but let’s hope it never comes to this and this deeply flawed policy does not come into fruition!)
Optimizing tax deductions through maintaining the loan balance or the majority of it, via making the minimum principal repayments has a two-pronged benefit when we keep our existing home which becomes an investment and purchases the new home:
1 – We have more ‘deductible’ good debt on the old home when it becomes an investment, meaning superior cash flow and upside for keeping the existing home.
2 – We have more offset savings available to go towards buying the new home which means we will have less ‘non-deductible’ bad debt on our future home.
Yes, it’s all achievable if we have a pre-planned Mortgage Strategy from the point of purchase!
The good news is that it’s never too late to fix your mortgage strategy, but every day that goes past with an incorrect mortgage strategy means you are leaving future money on the table and possibly reducing your chance of holding properties.
Here we have an example of a loan structure.
We’ve got our credit card, our fun offset account for our fun spending, our life offset for our variable necessities and the grow offset account for our savings and fixed expenses.
The grow account is the one that we build up our savings that would have otherwise gone into paying down the home loan.
So, in this case, if our home loan is about $600,000. Our repayment goes to our home loan and instead of paying down the home loan, what we want to do is to build up our grow account. We still make our minimum repayment, but we don’t make an extra repayment into the home loan other than the minimum principal and interest repayment to access the lower interest rate.
That way our grow account builds up over time!
So, it’s same as paying off our home loan if our balance is 600k. But the main thing is that our grow account cash can go to funding your future home.
Even if you paid small principal and interest repayments and the balance is now 550k (for our existing home loan) and we paid off 50k over the journey. Now we can claim tax deduction on the interest of 550k and in this scenario we would have $550,000 to go towards the future home rather than $600,000.
Through this mortgage strategy, we can –
- optimize the tax deductions,
- maintain a loan balance so we do not fall foul of the Purpose Test by accessing redraw to buy the new home and then break the law by claiming that interest because the funds when to the new home,
- and we have a whole lot of saving that goes towards the new home to so we borrow less bad debt.
If this sounds a little complex, reach out to us, one of our Strategic Mortgage Brokers can explain it in full and some of the other hundreds of mortgage strategy tips that keep more dollars in your pocket over your lifetime!
Until next time, remember you can get a great rate from anyone, but not many people will invest the time to educate and empower you to set up a mortgage strategy as well that takes into account your situation today and your future Property Plan’s!