Smash Money into Mortgage or Pump into Offset/Savings

Hi everyone,

Long time lurker here! (possibly my second or third post)

Some context: Fiancé and I are currently living in an apartment that we own. Paying principal and interest and dumping money into the offset. Fixed loan with 6 months left.

We are scouring Sydney looking for a house to purchase as we are looking to start family soon and require something bigger. We are at a crossroads with 2 options.

(a) Buy investment and soldier on by staying in the apartment for 3 years and then consolidating accumulated wealth (equity from both property and savings) to buy our dream home
(b) Buy dream house to move in and rent out apartment (or even sell apartment?). This seems unlikely as the suburbs where we ideally want to settle is hot AF at the moment

Both earning ~$180K each

Question: Regardless of which route we take, would it be wise to:
(1) only pay principal and interest and pump money into offset or savings account
(2) pay principal and interest on the fixed component of the loan but smash into the repayments of the variable component

Yes, I’ve spoken to my account, broker, friends and family but wanted to widen my research here (Dare I say that OzBargain is the most financial savvy posse in Australia? Haha)

Please sing out if you need any clarification.
Thank you all in advance!

Comments

  • +3

    Regardless of which route we take…

    Tips I read online is don't pay principal on PPOR property which will be an IP. You get less tax deduction.

    • +1

      Thanks for you reply.

      So better off paying interest only on the apartment if it becomes our IP and pump into the mortgage of our new PPOR or offset.

      • +3

        Yes, if you know your apartment is going to become IP, better to not pay down the mortgage. If you redraw in the future, you cannot claim tax deduction on that portion unless you can prove the money redrawn was used for income producing purposes. Although I think this may also apply to money placed in offsets as well, so you need to either read up or find an accountant to help plan this.

        • Cheers!

        • +1

          Offset doesn't actually trigger this situation.

  • -1

    pump money into offset or savings account

    This is the worse thing people can do with their fiat. Idle fiat is dead fiat.

    At least look into buying assets that outperform inflation.

    • +6

      At least look into buying assets that outperform inflation.

      Let me announce to the audience the arrival of Lord Crypto Troll.

      • +2

        He's not wrong though.
        Crypto aside, even most ETF returns will out perform ~2% you're getting in your offset / savings.

        • +1

          Am I the only one expecting a stock market crash soon? I mean it's that time of the year plus just have a look at the NASDAQ graph.

        • +1

          even most ETF returns will out perform ~2% you're getting in your offset / savings.

          Yes, now. But wait for a "hicup" and your money melt away …. then what ? Remember OP wants to buy, and possibly soon.

  • +1

    you both earn very respectable incomes so this may not be a problem. However if you have an IO loan, your borrowing capacity for your next property generally won't be as high as if the loan was P&I (in my experience anyway). So you should discuss your lending requirements with a broker to understand whether a IO or P&I is better in your situation for your next purchase .

    If borrowing capacity isn't an issue, generally speaking an IO loan with offset might be the best way to go once your fixed rate expires. Try to refinance, that way you're locking in a PPOR rate now even if it becomes an IP soon (IP rates are generally more expensive). You can keep adding extra repayments to your offset while you look for a new residence, then extract as your deposit for new place and maximise your tax deductions as an IP. (if you already have enough for a deposit, you may want to consider a different investment vehicle rather than the offset )

    • Appreciate the advice!

  • +5

    Get a loan with dual income. Don't tell the bank you are going to have kids otherwise they will increase your cost of living and probably assess you with one income.

    Other than that think if you are earning a combined $360k you can pay for some talented accountants and financial advisors to sort you out. It is tax deductible.

    • Thanks - we've been previously advised that having a dependent will decrease borrowing capacity by approx $150-200k.

      Spoken to my accountant and also seeking recommendations for financial advisors and other accountants too at the moment.

  • +1

    possibly my second or third post

    Fifth, well done.

    • haha thanks for checking.

  • +1

    I am going to throw a curveball suggestion here:

    Sell your current property. Using the proceeds of your property (i mean, use only 20% of it) and your high borrowing capacity (over $2m in my guess) go buy your dream home at ~$3m. Move-in on settlement day, live in it for 6 months to trigger as your primary place of residence and make it exempt from CGT, rent it out for $2k per week, whilst you now go back and rent a similar apartment and pay $750 per week. In the meantime, your might have an infant - congrats - but the little one won't care what an apartment is so you will be fine for about 4 years. Now in this period of time, you probably have been more frugal (nice word to tell someone who earns a decent income ;) ) and manage to buy another $1m investment property (using nothing more than paper equity and your high borrowing capacity).

    As you past year 5 (of the settlement of your dream home) and the child needs a bit more space, or if number 2 has arrived, you let the tenants know you need them out so you can move back into your dream home before the CGT exemption is breached. You now live in a dream home, and own an income-generating investment, and continue living your best life.

    • This was an option we considered.

      Unfortunately, valuation for the apartment came in at $750K (owing $584K).

      Broker suggested to borrow max $1.8M to $1.9M. This way we wouldn't have to sacrifice too much and can service the loan comfortably. This option would also enable us to keep the apartment as a IP.

      He also advised that if we were to sell the apartment, this would enable us to borrow $2.1M to $2.2M and be able to comfortably service the loan.

      Sadly though, for where we want to purchase (Inner-West, Canada Bay, Bayside) - prices have soared exponentially over the last 6 to 8 months. A property in Strathfield we loved was sold in January for $2.2M - unfortunately, we didn't think we were ready then. If the asking price was $2.2M today, would've jumped at it! However, if this same property was listed today, the guide would be +$2.8M. This is the case looking at sold properties over the last 6 to 8 months - plentiful were sold between $1.6M to $1.8M for decent sized blocks in these areas.

      If you're curious, here is the property in Strathfield - https://www.realestate.com.au/sold/property-house-nsw-strath...

      • Wentworth Rd is too busy anyway.

      • Looks like a lovely property and good value at $2.2m. I can definitely see $2.8m written over it if on the market right now.

        The question I ask myself is, do I need it or want it? Usually, the answer points me in the right direction.

  • +1

    Dont wait 3 years to buy, and dont buy at auction, see if there are any listed prices left. But sell at auction.

    • Thanks - We've been told the same, that is not to wait 3 years.

      Totally understand that buying a property isn't probably something that should be rushed but we are in a situation where we need/should be buying within the next few months.

  • +2

    Smash Money into Mortgage or Pump into Offset/Savings

    Have you considered pumping it into your mortgage or smashing it into your offset?

    • hahaha yes ;)

  • weird flex but okay

  • Sell the apartment & buy the house you want, everything else is too complicated I doubt you will be able to afford two mortgages with a baby, babies are expensive. Please don't even think about crypto or ETF's or anything but your bank account for the settlement funds from the apartment sale. The house to raise your family in is the primary focus above all else.