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ATO Breakthrough On Paying Off Your Home Loan Sooner!Monday, December 18 2006Capitalized Interest Loans Over the last few years there has been ongoing controversy about people using the proceeds (rent & tax benefits) of an investment property(s) to help pay off their home loan faster. This is achieved by using what is referred to as a split loan that employs a Line of Credit facility which is then divided into two sub-accounts. One sub-account is used to purchase an income producing asset and the other is used for the home loan. Now certain lenders do not require you to make any payments back into either of those accounts on these types of loans as long as the loan balance does not exceed the approved limit. How They Work Therefore, if you owed $150,000, but had the loan limit approved for $200,000 you could then go on an extended holiday and not have to worry about making any repayments until the accruing interest and the unpaid balance reached the approved limit of $200,000. At that stage you would have to start making repayments or, if you had the borrowing capacity you could in fact have the limit increased and continue doing what you had been doing, making no repayments. So, to enable the strategy of paying off your home loan faster, to work, you do not pay anything toward the investment account until after your home loan is repaid in full. Channeling Your Cash Flow In other words, you put all of your cash flow (salary, rent, tax credit etc.) into sub-account (A) (your home loan account). In the meantime you have set up sub-account (B) to house your investment property loan, along with an additional increased amount to allow for the ongoing accumulation of the unpaid interest payments of your investment property, and the interest you will be charged on the unpaid interest (capitalized interest). What the heck, lets just throw the ongoing additional property expenses in there too! You continue doing this until you’ve paid your home loan off. The Good News In an Interpretative decision 2006/298 the Australian Taxation Office (ATO) has said that despite the lack of repayments, the compounding interest on the investment sub-account (B) is still able to be deducted against the income that asset produced. The Bad News It is important to be aware that you will be operating a Line of Credit facility which will give you easy access to funds when and where you want them. I’m just giving this cautionary note because when you’re operating this type of facility you need to do so with discipline. Otherwise if you get ahead of yourself by overspending (and the temptation will be there) it can bring you some financial headaches. You may find our Monthly Cash Flow (budget) Calculator (Excel file, 42KB) an invaluable aid in managing your finances to enable this type of strategy to work effectively for you. The Very Good News If you manage your finances well, it means you can capitalize the interest on one part of the loan, while paying off the other. It will allow you to pay off your home loan faster. Depending on how well you manage your finances, it could be very fast. At the same time you would be receiving additional negative gearing tax benefits on the investment portion of the Line of Credit. Equity Resource provide a no cost/no obligation consultation using advanced software that enables us to produce personalized cash flow projections on this type of strategy, if you’re interested. It’s worth remembering in regard to your home loan that interest saved is interest earned tax free. The most effective investment you can make is to pay off your home loan first. Equity Resource specialize in the structuring of these types of loans. So, if you need any further information or assistance drop us a line. BudgetCalculator1.3.xlsBack to News |
