Pay off mortgage or put in term deposit

[Purple Property]

We’ve just sold an Auckland property and settlement is in 2 weeks. We will walk away with approx 200k.

We have a rental property (two bedroom unit) in my wife’s name only in Tauranga value circa 400k and loans circa 300k.

We are wanting to buy our own 3 bedroom family home for us and our two daughters in Tauranga in 12-24 months time. My wife is currently on maternity leave.

We are going to put our own home and potentially the rental into a family trust due to the nature of our professions.

We are tossing up whether to pay off 200k into the mortgage of the rental or whether to put it in a term deposit. My father worked for ANZ for 40+ years and has said that if we put it against the rental mortgage there is no guarantee with bank and government policies that we would be able to sell the property into the trust to free it up, make the rental 100% tax deductible borrowing and buy our own home, hence the term deposit option in the interim.

Thoughts?

[Rosco]

Get advice from your accountant, as it will depend a bit on your structure.

Another option is using Total Money product from BNZ or similar from other banks.

Term deposit offset the loans, and you just pay interest on the net amount owing.

Ross

[flyernzl]

Bear in mind that the $200k in cash will be your own money to do with wahtever you like, with no tax implications.
However, if you use it to pay off the mortgage on your rental (where the interest is currently a tax deductable expense) and then reborrow on that rental to fund the purchase of your own home that new loan will no be deductable.
So no, do not pay off the rental.

[Rosco]

Bear in mind that the $200k in cash will be your own money to do with wahtever you like, with no tax implications.
However, if you use it to pay off the mortgage on your rental (where the interest is currently a tax deductable expense) and then reborrow on that rental to fund the purchase of your own home that new loan will no be deductable.
So no, do not pay off the rental.

The answer to that depends on the structure, or in other words the entity that owns the rental property. So best to check with their accountant as it might be fine to use the cash to pay of the rental loan, or it also might not be!

[GLin]

I agree with Rosco.

An offset account like Total Money from BNZ is fantastic.

[DaveW]

An offset account can be convenient to have but when the tide turns and banks tighten on lending then you will wish you had not put the cash in with the same bank as your mortgages. Banks can decrease your offset limit on a whim. During hard times cash is king and needs to be protected

[donna]

Great input here - it's easy to just think paying down the loans is the way to go and as you say DaveW, be left with no $$ when it's needed the most.

I am thinking do I pay down the LOC loan or put it into my kiwisaver? I know it ties up the $$ in KS but it will be mine when I will probably need it the most.

cheers,

Donna

[Learning]

I've always thought it's not worth saving a dollar at 2% interest as long as I've got a dollar of dept costing me more.

[flyernzl]

A dollar of tax deducatble debt may be worth less than a dollar of cash that has no tax implications.

[DaveW]

When I say cash I don't mean shove it under the mattress. You can put it in term deposits, kiwi saver, ...

[BlueSky]

You need to structure it accordingly with entities.

both home and rental in trust is also risky.

See a professional

[Lanthanide]

An offset account can be convenient to have but when the tide turns and banks tighten on lending then you will wish you had not put the cash in with the same bank as your mortgages. Banks can decrease your offset limit on a whim. During hard times cash is king and needs to be protected

You are correct if you are talking about revolving credit.

Offset mortgage (as offered by BNZ and Kiwibank at least) are NOT revolving credit.

It works like a regular mortgage where interest and principal payments are made each month. The cash you have sitting in an offset account reduces the interest accrued each month, but you still have scheduled monthly payments and when the interest portion of the payment goes down, the principal portion goes up.

That is not the same as a revolving credit, where you put all money into the mortgage itself, reducing the balance so less interest is charged each month, but revolving credit mortgages don't have fixed monthly payments whereas offset mortgages do.

You shouldn't use revolving credit mortgage for rental properties because each time you 'pay down' the mortgage (eg when your salary comes in), but then 're-draw' the mortgage to pay for daily bills (eg the power bill), the IRD consider the portion used to pay the bills is now not for the purpose of financing the rental property, and so you now can't claim the interest back on this portion of the loan as an expense against your rental income. As more and more months go by, the proportion of the outstanding loan that is still used for the purpose of financing the rental property will decrease, even if the total amount owing on the revolving credit mortgage has not reduced by much.

Offset mortgages do not have any of these problems.

[PC]

Keep LOC account separate.
Deposit all the rents into it.
Keep a separate personal account for salary, living expenses.
Then LOC works just fine - till you see the next nice shiny thing to buy...

[Lanthanide]

Sure, but it means your personal money won't reduce the interest you are paying on your rental mortgage.

Offset mortgages let you do that, but don't taint the interest deductibility of the loan. The only downside is that they can't be interest-only, but that's it.

[DaveW]

You're right about the benefits of offset mortgage over revolving credit type, however my comment still stands. If you don't put your cash in a separate bank/investment then in an economic downturn the bank has the right to use the money in your offset account to reduce the limit of your mortgages.