Question: I am a first home buyer looking into home loan features available like 100% offset and redraw. When I purchase my first home, I plan to live in it for up to two years and then turn it into an investment property. The next property I purchase will be the one that I plan to live in long term. I want to save as much as I can in the first two years and then use this to go towards the second purchase. I want to use my savings to save me interest during that time but still want to be able to have the maximum tax deduction possible on this property when it turns into an investment property. How is this best achieved?
Answer: A lot of loans will enable you to make extra repayments and redraw for free. This is an excellent feature for owner-occupied properties and non-tax deductible debt and will save you the same amount in interest as a 100% offset account. Paying extra and redrawing for free is a common feature with non-bank lenders that enables you to take advantage of some of the cheapest interest rates around and still use your spare cash to save you interest. The banks, on the other hand, offer the best 100% offset transaction accounts as part of their home loan packages. They do however come with an annual fee and are not likely to set the world on fire with their interest rate offering.
Your accountant will probably advise you to go interest only on your loan during the first two years so that you will accumulate more savings to go towards the new purchase in the future. To save you interest while you live in the first property, you may be advised to get a loan with a separate 100% offset transaction account. You will be able to keep your savings in this account and save your interest while still keeping your loan at the maximum. When it is turned into an investment property, you will receive a tax deduction on interest on the full balance which can clearly be traced on your loan statements. Then when you purchase the second property to live in long term, you can choose a cheaper non-bank loan that still allows you to pay extra and redraw for free. And of course – always seek tax advice from your accountant.
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