Hello and welcome to episode number nine of Mortgage strategy 101. Today we will be discussing with you one of the key tips on how to optimize your tax deductions within your mortgage strategy. Today’s tip is all about accessing your redraw on your investment loan to pay for your tax deductible expenses. And here’s how it works. So basically in this example we have someone with $800,000 home loan and they’re paying an interest rate of 3.8%. All right! In their grow offset account they’ve got about $200,000 of savings, so they’re paying interest on about $600,000. On their investment loan they have a balance of $450,000, the limit on the loan is $600,000, so there’s access to redraw $150,000 in this example and the interest rate is 4.5% Now many people will wonder well why should I be paying for my tax deductible expenses with debt rather than savings and so I’ll explain why. Essentially if you paying from your savings, you are then having less money in your offset account which means you’re effectively paying more interest on your home loan. Okay, so you’re paying the tax deductible expenses from savings, it reduces how much you are offsetting your home loan which equals more interest on your home loan. Now the other complicating factor if you like to understand is people think “that’s okay my interest rates lower on my home loan than it is on my investment loan” but not after your tax deduction. Alright so these are pretty common interest rates at the moment for an interest only investment loan and a principal and interest home loan. So if your tax bracket is 32.5% your effective interest rate is give or take it’s 3.03% after your tax deduction, at 4.5 if you’re under 37% tax rate then it’s 2.80% and if you’re on the top tax bracket then it’s 2.47%. Okay so the true interest rate cost of your investment loan is lower 3.03%, 2.80% and 2.47% then the cost of your home loan. Therefore you want to be paying more interest on your investment loan and less interest on your home loan. Okay, so let’s say you’ve had some repairs and maintenance and the bill is ten thousand dollars what you do is you then redraw $10,000 from your investment loan, so your balance would then go up to plus $10,000, makes it $460,000.
$450,000 + $10,000=$460,000 and your balance here would go to $210,000 in your offset, for a day let’s say but then you pay for your tax deductible expenses with that $10,000 but it’s been transferred from redrawing to investment loan to your offset account and then you pay for it. And what that means is overall you have the same level of debt but you have more tax deductible interest and less non-deductible interest. Whereas if you had to pay the ten thousand straight from here you would only have $190,000 in your offset account and therefore effectively you’re paying interest on another $10,000. All right so all these little things, all these little mortgage strategies and there’s big mortgage strategies as well, add up to more dollars in your pocket and less dollars in the banks or in this case you’re optimizing your tax deductions. So you don’t have to pay for tax man as much and you’re doing it obviously legally. So I hope that made sense. Please reach out to us to understand more about how to optimize your mortgage strategy and until next time have a great day!