Excess funds - term deposit or pay down loan?

[investorak]

My partner and I are living in our rental atm which we will stay in most likely for 3 years and maybe more. We will look at buying more rentals in 3-5 years so will be great to have access to funds around this time

The mortgage on this rental is $396,400, value 700k

We currently have 280k which we currently have in a savings account not making much interest.
We could put this money into a term deposit with ASB for 9 months at 3.6%. After 9 months it will $285,464 after tax so it would have increased by $5464 over 9 months

1) How can i compare the savings if i paid off the loan instead of having the money in a term deposit after 9 months? currently on floating so instead of the mortgage being $396,400, it will be $116,400. We are paying p&i with ANZ, 4.64% floating

2) Which would be better to do? term deposit gives us more flexibility but we already have 342k as revolving accounts so having 280k in term deposit and 342k revolving accounts might be excessive to have and we will pay more interest then what we need to

a) 342k revolving account, 280k term deposit and $396k mortgage
b) 342k revolving account, $116,400 mortgage

3) If we go with option b and then decide to rent it out, the property will be positive by a long shot so will be paying quite a bit of tax? can we take the money out later and the extra interest we need to pay will still be tax deductible?

[Anthonyacat]

You really need to talk to your accountant about this. Get some advice that gives you a good understanding of deductibility as it relates to your situation. But generally:

1) To compare the savings, take the interest rate on the mortgage, and subtract the rate on the term deposit. For example, if you choose to put money into a TD at 4%, versus your mortgage at 5%, you're losing out on 1% per year.

2) Which would be better to do depends on your preferences. Most people would say pay down the debt. Whether the term deposit actually gives you more flexibility depends on whether the banks want to lend to you in 3-5 years. If they do, you're much better off paying off the mortgage.

3) Depending on your ownership structure, you probably can't just remortgage and it be deductible again. This applies even to your revolving credit. But if you take it out for another rental purchase, that'll be deductible.

Have you considered asking the bank to make an extra $300k revolving? Then the answer would be very simple.

[Rosco]

Hi Investorak,

Who owns the rental you are living in? If this is a company you are likely to have issues, and might need to restructure to move the house to a different ownership structure. This could create all kinds of additional issues that you need to be certain off, such as depreciation recovery, possible tax on gains etc

For the other part, I would look at BNZ total money. Your cash can offset you mortgage and save you interest at the mortgage interest rate. Plus you still have the cash available.

Only issue with revolving credits, is they can be approved now, but taken away later as bank rules change.

Ross