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Effective Loan Structure

  • Having the right loan structure can save you more money than just having the cheapest loan.
  • Separating non-deductible and deductible debt means you will maximise tax benefits and simplify your finances
  • Using offset accounts and credit cards to pay your loan off sooner

Variable or Fixed?

Variable loans
  • Flexibility - extra repayments, redraw
  • More product choice – offsets, lines of credit
  • Will fluctuate with market conditions

Fixed loans
  • Security of set repayments
  • Insurance against future rate rises
  • Lacks flexibility
  • Costly to exit

Interest Only or Principal and Interest?

  • Interest Only repayments can lower your repayments however can cost you more over time
  • Principal and Interest repayments are higher than I/O however have the benefit of reducing your loan over time and will cost you less in interest over the long term


Deductible or Non Deductible Debt

  • Deductible debt is usually loans that have been taken for business or investment purposes
  • Deductible debt is usually loans that have been taken for business or investment purposes
  • Remember it’s the purpose of the funds NOT the property by which the loan is secured.
  • It’s best to clearly separate the different debts to maximize the tax benefits and simplify your finances

 

100% offset account

An offset account is a separate savings account where the balance is offset daily against the loan amount.

For example, if you have an Home Loan with $200,000 owing and a 100% offset account with a credit balance of $20,000, in effect, you will only pay interest on your home loan on a notional balance of $180,000.

Recommendations

  • Use an offset account attached to your non-deductible debt. Repayments should be P&I and loan variable.
  • Set up separate loans for deductible debt. Loans should be Interest Only and either basic fixed or variable or lines of credit.
  • Use credit card with 55 interest free days for day to day expenditure and then automatically sweep at end of month.

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