Dr. Chloe is a very happy iChoice client, and you guessed it, I’m going to tell you why.
She had an $800,000 home loan at CBA, with $150,000 in her offset account. That’s fine I guess, but the elephant in the room was that the $600,000 business loan she had at NAB/ Medfin was being serviced on a P&I basis.
Because it was secured solely by her Practice, it also came with a nasty interest rate. It looked like this:
[Note that red = non tax deductible, and green = tax deductible]
Like most borrowers who rely on their Business Banker’s for advice, she had no idea that her business loan could be secured by her home, with all the flexibility that a housing-loan product offers.
By changing the business loan to be Interest-Only, she will now own her home much sooner. She now keeps her ‘good debt’ high, and is able to pay down her ‘bad debt’ faster. It’s Tax Effective Lending #101.
It now looks like this:
The interest rate on her business loan is now 4.74%. This is not a misprint. Business/Investment – Interest Only – 4.74%. What the! To put it in perspective, before the rate rises, this rate was 1.99%. This rate is not published to the general public. Most unrepresented borrowers pay even more than this on their P&I home loan !! ~
And the bank gave her a $5,000 Refinance Rebate; too funny.
Anybody who has an investment/ tax-deductible loan should consider refinancing it to establish a fresh 30-year loan term. It will allow them to more quickly pay down their loan. This is why so many of us refinance our investment loans every few years. Doing this also improves our borrowing Capacity!
Wondering why we recommended she split her home loan into 2 (Loans A and B)?
By making Loan A represent the effective debt (what she really owes) and keeping the unlocked equity as a separate split we call Loan B (full in offset), it is now separately identifiable. This is just in case these offset funds are used for a tax-deductible purpose. The reason why its coloured amber is because we don’t know yet what she’ll use the funds for. If she writes a cheque to pay for an office refurbishment, it will turn green. If she uses the money to buy a boat, it will turn red.
The funny thing is that in a few months I’m helping her clear her home loan completely. You see, she owns the building her surgery operates from, which she bought many years ago. Its Regional, and worth $500,000, without any debt.
We’re setting up a SMSF (Self-Managed Superfund) so that it can acquire the commercial property of her. She was unaware that Stamp Duty here in NSW doesn’t come into play, and the Capital Gain will be ignored, thanks to Small Business Tax Concessions. I might tell this story another time.
I’ve allocated Boxing Day to be Soxing Day. My family are taking all our single socks into the loungeroom the day after Chrissie and sorting through them all, together, pairing what we can. Any leftover will be put in the draw under the BBQ. It’s a tradition, that just hasn’t started yet. Just amazing how many unpaired socks exist, at my age.
Writing these emails gives me so much joy, it’s my little creative outlet – so thank you for reading and all your support.
Happy hump day – a pinch & a punch for tomorrow – what a great time of the year, right?
Coming Up in 2023: In-species non concessional contributions to facilitate SMSF acquisitions and what is changing, Qantas Points maximisation, Lifetime Cap for Small Business Tax Concessions and when they disappear, how to name your children, Bucket companies, Land Tax secrets and what to look for when buying Commercial property.