This morning I delivered a key-note presentation to the staff at a local primary school. The brief was “How to save money on your home loan”.
Afterwards as I was mingling in the crowd and an indignant teacher asked me about his investment property, specifically why he should bother with refinancing to save interest, given it’s tax deductible anyway?
It’s a powerful question and one that leads into more serious debt reduction talks. For the benefit of my readers I thought I’d discuss it as this weeks topic.
The question I’m going to answer is when is it right to pay down an investment property loan. The answer is, as always, it depends.
When repaying your debts it’s often wise to look at things objectively. Your credit card would usually be the first thing that should be paid down, as it will be incurring interest at often obscene rates. The second would usually be a car or other personal loan, as this is the next highest. Your home loan should be the next in line as this is often a significant debt that offers little, if any, taxation benefits.
Investment property interest paid can be one of those deductions that people love to have for the sake of it. Having worked as a Tax Accountant I think it often akin to buying stationary you don’t need, in June just to have the tax deduction in July. Getting back to the original question though, if you had no other non-deductible debts, for instance you’ve paid off your credit card and your home mortgage, what benefit is the loan to you?
If you are a great saver, have inherited money or otherwise don’t have a home loan, a credit card or other loan, firstly – congratulations. Secondly, assuming you have an investment property that is offering tax benefits to keep the loan, why shouldn’t you keep it?
You wouldn’t – because even though it is saving you money on your tax bill each year – it’s only saving you roughly 32 cents in the dollar – more or less depending on which tax bracket you fall into. That still represents 68 cents for every dollar that you have to pay to claim the tax deduction. Why pay money out to the lender, to get just a third of it back from the Tax Office?
There could be a number of reasons why your circumstances may benefit you to keep the property geared, although for many – it can be little more than a common misconception. Paying down your debt is usually of great benefit. A property is a wonderful asset, and one that you can always borrow against later down the track if you find a worthwhile purpose.
There are a number of factors that come into play and I must declare that this advice I have provided is only intended to be general in nature and doesn’t take into account your individual circumstances and should not be relied upon as such.
Make contact with me to discuss your specific individual circumstances. There’s nothing like a good brainstorm.