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, ...