17 Jan An accountants view of loans
Here are Grow Accounting we look after rental property owners & property developers all over Australia & it’s fair to say we see more investment loans than your average accountant. If you are like one of the 2 million people in Australia with an investment property & have a loan or are ever going to get a loan in the future we would like to make the follow observations.
The Bank is NOT your friend.
Harsh I know but I will stick to my guns! Your bank manager may indeed be your friend & help you get the best deal he can; however he is still governed by the policy of the bank & can only recommend his bank products …. All of the banks will give you a great deal the more loans you have with them & this can be very tempting however I do suggest you follow the advice of some of the property guru’s out there. Do not cross collateralise your property & never ever use the same bank for your business lending.
One of the best banking features is an offset account. None of us have a crystal ball & don’t know for certain how long we will live or own a property for. A really common situation we see is when people buy a home to live in & put all their efforts into paying this down as quickly as possible. A few years pass and then they decide to move on into another property and make their old home a rental property. This home now has a very small loan against it & any interest on funds used in a refinance for a new home (to live in) are not claimable.
For this reason I suggest you always use an offset account – let me give you an example:
Purchase a home for $450,000 – loan is $350,000 & over the next 10 years is reduced down to $200,000. After 10 years you want to buy a new house for $650,000 & refinance the loan to get out the 20% deposit of $130,000. You now have the original loan of $200,000 which the interest is tax deductible, the loan of $130,000 that is not deductible even though it is secured against the investment property & home loan of $520,000 which is also not claimable – a total of $650,000 non-deductible debt.
Contrast this to using an offset account – so with same scenario after the 10 years you pull out the $150,000 out of the offset account and use this to pay the deposit. You then end up with the original loan back at $350,000 which is all tax deductible & a home loan at $500,000 that is non-deductible
Once you start getting into further investment another great feature that is offered is sub-accounts or loan splits. These are best to utilize when one property has been refinanced & the funds are being used for multiple purposes. For e.g. you refinance your home loan from $250,000 up to $400,000; you would have 1 sub-account for the original amount of $250,000 (which won’t be deductible being your PPR), you would have another sub-account of $30,000 which was the funds you used to purchase a Ute & this is partly tax deductible in your name & you have the remaining sub-account of $70,000 which was then used to put a deposit on an investment property.
The benefits of the sub-account are that you save accounting fee’s in us calculating the interest that relates to the investment property & car but mostly importantly you would be paying off the debt on the sub-account that relates to your own home (preferably via an offset account).
You should also be reviewing your loans at least annually with your broker/bank to see if you are getting the best deal or its time to change banks. We saw a situation with a client recently who had been using the same bank that had not passed on rates cut she was entitled to and when brought to their attention they quickly adjusted her payments saving $5,000 per year. She had been entitled to this for the last 4 years so had forked out $20,000 extra to the bank without needing to.
A great broker will help save you money & provide invaluable advice along your investment journey. So please spend some time making sure you get it right; ask us, friends and family who they recommend and sometimes more importantly who they don’t recommend.