2

Suppose you have something like:

House 1 - ~$550k value. You live here.
House 2 - ~$575k value. Investment property. Tenanted at $570/week.

Loan 1 - $250k, 3.9% variable P&I, $1500 monthly repayment, fully offset (as in, there's $250k in cash sitting in a bank account against the loan, so zero interest currently accrues against this loan and each repayment currently knocks $1500 off the principal). Secured against House 1. Interest not tax deductible.
Loan 2 - $130k, 4.75% variable interest-only, ~$500 monthly repayment, $30k offset. Secured against House 1. Interest is tax deductible.
Loan 3 - $420k, 3.9% fixed P&I, $2,000 monthly repayment, $10k offset. Secured againt House 2. Interest is tax deductible.

Misc - $150k/year salary, no other debt, good credit.

Vehicle 1 - ~15 years old, purchased in 2010 for $15k or so. ~100k kms on it. Serviceable but a bit rusty (and getting rustier). Has been starting to develop minor issues (shift link cable broke and had to be towed, etc.).
Vehicle 2 - Under consideration for purchase. New, fully-electric. $93k purchase price (including tax, on-roads, delivery, etc.). Other options possible but only if they're fully electric.

The rental income from House 2 (less agent fees and other expenses) fully covers the costs of Loan 3, but nothing beyond that (aside from some tax benefits from depreciation, and being able to claim the interest on Loan 2 and Loan 3 as a deduction).

In this kind of situation, which option makes the most sense:

  1. Draw down the offset account(s) and pay cash for the vehicle? The extra interest that accrues against Loan 2 is tax deductible, and any amount taken from the Loan 1 offset gets a fairly modest 3.9% interest rate.

  2. Pay for it with new debt? Any interest accrued in this case would not be deductible, and the terms of the finance would probably be worse than either Loan 1 or Loan 2 (as far as interest rates and fees go, anyways). But it keeps the vehicle finance separate from the housing finance.

  3. Do neither, and just keep driving (and maintaining) the old car (and hoping it doesn't break down at an inopportune time/place)?

  • Are the offsets (which I've never heard used in this context) mandated by the mortgage company, or just something that you all decided to do? – RonJohn Jun 2 at 5:27
  • 1
    The latter. They're fairly common in Australia. Kind of vaguely like making early repayments on the loan and then redrawing (if/when the loan has automatic redraw). – aroth Jun 2 at 7:06
  • What interest rate is available to you for financing the car? – yoozer8 Jun 2 at 9:57
  • 2
    @aroth - it is actually quite different than a redraw in reality, because it you redew from an investment loan for some personal reason you would then have to portion the loan for the investment part:personal part. With an offset, as it is a separate account from the loan, you can spend the money in the offset on anything and it won't affect your deductibility of your investment loan. (But in simplistic view for the non-Australians, yes it is a bit similar to doing a redraw). – Victor Jun 2 at 10:08
  • @yoozer8 - Say 4.9% from no-name/online-only lenders, and more like 6.5% from established banks and lenders. – aroth Jun 2 at 10:14
2

By using the $40k in the two investment loans and then making the other $53K from the home loan would probably be the best option if you had to buy right now.

What you need to consider if you do take this option is how long would it take you to build that $53k back up into the offset account? If this period is not too long, you may consider putting the purchase off for say six months or a year until you can build up that $53k into your investment loan offset accounts.

I wouldn't take option 2 unless you could get some ridiculously low finance of 1% to 2%.

Any interest incurred on Loans 2 & 3 would be tax deductable, and with a salary of $150k, the OP would get back (in tax savings) 37% of any interest incurred on those loans. So even though loan 2 is at 4.75% the OP would get back 37% of 4.75% (about 1.75%), so would effectively be paying only 3% interest on that loan compared to 3.9% on Loan 1 (which is not tax deductable).

  • 1
    Why is sentence #1 true? – RonJohn Jun 2 at 12:35
  • 1
    @RonJohn - it is true (or the best option if buying now) because any interest incurred on Loans 2 & 3 would be tax deductable, and with a salary of $150k, the OP would get back (in tax savings) 37% of any interest incurred on those loans. So even though loan 2 is at 4.75% the OP would get back 37% of 4.75% (about 1.75%), so would effectively be paying only 3% interest on that loan compared to 3.9% on Loan 1 (which is not tax deductable). – Victor Jun 2 at 22:39

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.