Use Half Our Mortgage Redraw to Buy Shares?

blackfrancis75 on 18/10/2016 - 09:33

Seeking as much advice as I can muster on this one:

We have a mortgage on our home. The purchase price was 1.06M, We owe just under 690K. Property has appreciated somewhat, maybe worth 1.2, 1.3.
When we bought this home, I sold an investment property and as a result we have a redraw available on the Mortgage around 100K.

I'm contemplating investing half (50K) that redraw into shares. My approach for the choice of shares to invest in are:
1 ) Low-risk
2 ) Diversified (banking, retail, mining, agriculture, telco/tech)
3) Pays more than 4% dividends annually, fully franked

The benefits I see in this approach are:
1) We're not solely invested in property (if our primary residence can even be called an investment)
2) We'd be getting an effectively higher interest rate because >4% dividends are worth more than the offset the same money would save us on our mortgage

I'd keep half the redraw in the mortgage, at least to start with, in case of 'emergencies'.
So, you people who have more experience with this kind of thing (i.e: everyone), my question is - are there any pitfalls to this idea that I haven't considered? Would we really be better off?

Financial

Comments

  • Nugs on 18/10/2016 - 09:50
    +4

    never done it myself, but I believe you can claim interest on a loan used to get shares, rather than use redraw.

    • ESEMCE on 18/10/2016 - 09:51
      +4

      you can do this on a redraw… Just need to show evidence that the redraw was used to invest.

      • Boshait on 19/10/2016 - 10:00
        +2

        That's the advantage of redraw over offset.

        • [Deactivated] on 19/10/2016 - 20:54

          There's a means test regardless of where the money comes from. If it's used to invest the interest is deductible.

        • lysp on 21/10/2016 - 15:51

          @tantryl:

          The issue is redraw is essentially classed as a loan.

          Offset is your own money.

          If you redraw and spend 100% of it on shares, it's fine. If you use some for non-deductible purposes the loan becomes contaminated.

          With an offset, you can spend it on whatever you like, as taking the money out just increases the loan repayment.

          People have had issues with the ATO due to redraw.

        • Skramit on 21/10/2016 - 17:43

          @lysp: I acknowledge that people probably do the redraw and claim the interest. But if it were me I would want it to be squeaky clean and easy to manage and have no risk of getting calculations wrong so I'd want it in a separate loan account.

        • [Deactivated] on 21/10/2016 - 23:02

          @Skramit: it certainly has to be done carefully and in consultation with a competent tax accountant.

    • blackfrancis75 on 18/10/2016 - 09:56

      claim interest on a loan used to get shares

      Pardon my ignorance but do you mean claim the mortgage interest as a tax deduction? I'm not that familiar with the relevent tax rules

      • ESEMCE on 18/10/2016 - 11:26

        correct.. the interest paid on the amount withdrawn to invest.

        • backpaqer on 19/10/2016 - 10:12
          +2

          But trying to unentangle personal loans from investment loans when there is really only one loan could be problematic. Far better to get a "margin loan" (or a separate standard loan) where all reported interest is claimable as a deduction against assessable income (eg dividends etc).

        • justjack on 19/10/2016 - 23:24

          @backpaqer: Or a mortgage with an offset account, it is a fine line, but technically you have never paid the principal and you can feel free to 'redraw' from the offset account and buy a mercedes and deduct interest

      • voiper99 on 21/10/2016 - 06:58

        Unfortunately no, you cannot claim the tax deduction on your home loan's interest. You can only claim the interest on things which are investment related. In your case, that would be the $50K redraw.

    • prozerran on 20/10/2016 - 00:21
      +3

      Speak to an accountant. But this is what I understand when speaking to my accountant when I took out my investment loan.

      Correct me if I am wrong but I don't think you can claim a deduction on a loan that you took out originally for personal reasons ie home loan for your principle place of residence. Even if you use the some of the money for investment purposes, the original loan is for personal use only. This work if you take out a investment loan (then you will pay the higher rate of interest).

      Also, after you have repaid your investment loan - once you redraw from your loan account, you can no longer use this $$ as a tax deduction. That is why offset accounts work much better than redraw accounts.

      • sav11 on 20/10/2016 - 19:41

        That is correct

        • CheapskateQueen on 20/10/2016 - 20:12

          This is incorrect

        • zealmax on 21/10/2016 - 10:54

          @CheapskateQueen: You should get a new loan. You will need to get a top up and not redraw from the current loan. You will end up with 1 loan split for your current mortgage and another loan split(new loan) for the top up.

  • ESEMCE on 18/10/2016 - 09:50
    +9

    With that sort of money, it's probably worth you talking to someone who is actually qualified and knows your financial situation and therefore what tax breaks work best for you.

    • Scrooge McDuck on 19/10/2016 - 10:59
      +21

      someone who is actually qualified

      Like a Professional OzBargainer?

  • Skramit on 18/10/2016 - 09:56
    +6

    I use a similar strategy…

    At the moment it's just money sitting in your loan doing not much other than reducing your interest payable (which is still great), but in my opinion it's better to put it to work for you. However as it's your primary place of residence, I doubt you'd be able to claim the interest as a tax deduction. So what you can do is take out a new investment loan facility using the equity in the home, (identical if you were to take out a loan to buy an investment property), except you buy shares not property. That way you can now claim the interest payable on the loan as a tax deduction as it's an investment.

    If you simply redraw cash and buy shares with that, I'm fairly sure there's no tax deduction but happy to be corrected.

    If you go for low risk slow growth shares, you need to make sure the extra dividend earnings and capital growth are more than the extra interest payable on the existing home loan.

    With this strategy you get the double whammy of dividends and tax deduction.

    • blackfrancis75 on 18/10/2016 - 10:04

      Helpful advice!
      So, do I go to my mortgager and say (paraphrasing) "Can you lend me 50K at 4% so I can buy shares?"
      Is this a common thing?

      • Skramit on 18/10/2016 - 10:11
        +1

        Pretty much. Unlikely you'll get an identical rate to your home loan but it should be close if you have a good bank manager :) But yes you ask for a new loan facility for investing.

        Also worth speaking to an accountant whether it should be in your name, your partners name or both. Depends on your tax situations who should claim the tax deduction

        If using the house as equity, the owner(s) of the house would need to sign a guarantee document which is standard.

        So at the end of the day, you end up with a new investment offset account with $50k cash in it ready to buy shares. You only pay interest on the amount you draw out of the offset to buy your shares. Also known as a line of credit.

      • whoopdeedoo on 19/10/2016 - 19:12

        Yeah very common.
        just make sure its in a separate account so your interest and repayments arent diluted with your home loan repayments.
        it makes this easier to calculate your tax deductions.

    • thecraw on 22/10/2016 - 10:46

      I have it set up as a redraw against PPR and it is ok. It does make it difficult if you redraw for different reason but bottom line is if you have redrawn against your loan and use for investment purposes then yes the interest is tax deductible.PLus you get teh dividends etc etc

      Of course get good tax advice but its certainly doable..

  • inherentchoice on 18/10/2016 - 10:09
    +9

    Risky move.

    But if you're confident you can get more than 4% after-tax returns in the share market then feel free.

    • blackfrancis75 on 18/10/2016 - 10:11

      Why risky? Do you mean the risk of share price dipping? Or the risk that the dividend yeilds will change to be lower than the interest rate on the loan? Or something else

  • RandomNinja on 18/10/2016 - 10:11
    +7

    $ in home loan gives you a stable 'return' of whatever your interest rate is, but once you jump in to the share market it will be more volatile, even with low risk options. Will the ups and downs of the share market make you and/or your partner worry?

  • iamw0man on 18/10/2016 - 10:17
    -3

    An obvious point but shares are generally not profitable in the short term. If you're looking to retire anytime soon, shares may not be the best option. With that kind of sum, you could probably get a guaranteed 3% on a term deposit.

    • Skramit on 18/10/2016 - 11:28
      -1

      Can't say I agree….

      Shares are quite profitable in the short term. Picking a few common blue chip examples:

      ANZ ~8%
      Commbank ~8%
      Telstra ~8%

      Nearly triple a cash term deposit.

      • railspider on 18/10/2016 - 11:42
        +5

        CBA is 3.14% return over the past 12 months… and only a fortune teller could predict what it will do the next 12.

        Shares are profitable over the long term, but you'll absolutely have some down years and predicting when they will occur is next to impossible

        • Skramit on 18/10/2016 - 11:45
          +4

          I was including the franking credits…. which is investment return nonetheless.

      • YellowDieselGolf on 19/10/2016 - 14:43
        +1

        I personal wouldn't risk it. I'm down 27.59% on NAB and 15.46 down on WOW.

        I did some research before buying and still took a hit.

        That said, I'm up 51% on JB so it can go both ways.

        • Skramit on 19/10/2016 - 14:44
          +1

          Diversification is key :)

        • serpserpserp on 21/10/2016 - 20:34

          Not sure how you could have researched NAB at the top of the market and still thought it was a buy? :/

        • YellowDieselGolf on 22/10/2016 - 08:17

          @serpserpserp:

          Me too.

          It was on a few "buy" lists at the time. I don't trust them as much now.

        • serpserpserp on 22/10/2016 - 20:43

          @YellowDieselGolf:

          They were only on the buy lists because they had the lowest PE of the 4 banks. But I don't see that as a reason to pick up a stock…

    • pais on 18/10/2016 - 11:30
      +7

      With that kind of sum, you could probably get a guaranteed 3% on a term deposit.

      You're not going to withdraw money from a loan costing you 4% p.a. to put it in a term deposit netting you 3% p.a….

      Well, I mean, you can… but you probably don't want to.

  • dasher86 on 18/10/2016 - 10:23
    +4

    Islamic bonds seem to be interesting.

    • mick123 on 18/10/2016 - 10:34
      +7

      what the….. oh.. bonds, never mind.

      thought u said bombs..

      • [Deactivated] on 18/10/2016 - 11:38
        +11

        yeah, islamic bombs are blowing up right now…..

        • blackfrancis75 on 18/10/2016 - 13:32
          +14

          quite an explosive (in)vest(ment)

        • kiitos on 19/10/2016 - 23:13
          +2

          @blackfrancis75:
          It's the nuclear weapons that have serious yield, though.

        • serpserpserp on 21/10/2016 - 20:36

          @kiitos:

          Might need to buy some Boral shares for some yield protection…

    • sushirais on 19/10/2016 - 20:55

      Please elaborate, keen on learning

  • railspider on 18/10/2016 - 11:12
    +6

    Would pretty strongly recommend this, unless you're doing it for tax deduction reasons.

    To make this whole venture worthwhile you need to get a better return from your shares (dividends + growth) than you are getting from your mortgage offset - which I'm guessing is around 4%? When you take into account taxes on those dividends and CGT, plus transactions costs, it's a tough ask. Add to that the not insignificant risk of a market downturn, and I'm not sure it's worth taking the money from your offset to chase at most a few percentage points extra return.

    As an earlier poster said, this is the sort of decision for which you seek out independent financial advice. But before you do I'd think again about what you're hoping to achieve here, and be aware of the risk you're choosing to take on.

    • inherentchoice on 18/10/2016 - 11:28
      +6

      Do you mean recommend against this?

      • railspider on 18/10/2016 - 11:33
        +8

        recommend AGAINST. Eek, missed the most important word from my rant.

        Thanks for pointing that out

    • blackfrancis75 on 18/10/2016 - 11:50

      OK fair points, but to clarify:

      • I'm only seeking dividend yields, not capital gains
      • I would select stocks with a fully franked annual dividend over 4% (mortgage rate). So, the return after tax would be higher than mortgage interest rate. There seem to be a fair few of these - and not just 'risky' stock
      • transaction fees shouldn't be much of a factor if I do the trades myself using e*trade?
      • the aim is two fold: higher (albeit slightly) rate of interest, but also diversifying our investments so it's not all on our house
      • Skramit on 18/10/2016 - 12:00

        You can get both high yields and capital gains if you get good advice from a broker, rather than just randomly picking what appear to be good shares. My advice is to get professional advice via a broker and accountant. In the long run their advice can be worth the fees, easily. That's my experience anyway. I use a broker and don;t regret it for a second.

        Franked dividends are the forgotten investment return that do make a difference but most people forget about that. ANZ might pay 'only' 5% dividends but the 3% franking credit make it just that little bit sweeter reducing your tax and contributing towards hopefully a bigger tax return at EOFY.

      • OzFrugie on 19/10/2016 - 00:41
        +6

        Consider that assuming your on 37 pct plus 2 pct medicare levy tax bracket and your home loan rate at 4 pct, your total annualised (compunded) return from the investment and tax deduction will need to be bigger than 6.6 pct per annum after tax

        4 / (1 - (0.37 + 0.02))

        Let's say you put your money in banks stock which have high dividend eg WBC 8.9% p.a. Gross, which after tax will be 8.9% x 0.61 = 5.4% p.a.

        Tax deduction will give you added return of

        50k x 4.5 pct (assumed investment loan rate) x 0.39 / 50k = 1.8%

        Total return p.a. = 5.4 + 1.8 = 7.2% p.a.

        But you also need take the loan servicing cost into account ..

        So net return = 7.2 - 4.5 = 2.7% p.a.

        6.6% p.a. (if in offset/pay down home loan)
        vs
        2.7% p.a. from dividend (and tax deduction)

        Of course this excludes capital growth but that's another story..

        I think relying on dividend itself will not get you ahead as per example calc above. You would need consider capital growth as well to get ahead.

        I myself look to do this though to diversify and i have a long term investment horizon of at least 10 years so hopefully I would have a nice capital growth then.
        I am trying to time the market as currently looks quite volatile with US election coming up and potential US Fed rate hike in Dec but I may pull the trigger and be done with it if asx keeps creeping up after Dec or early next year.

        Happy to be corrected if the calculations above are not correct

        • darkchoc on 19/10/2016 - 18:17

          Hey mate. Awesome for the detailed calculations. but something about the comparison doesn't add up. Leveraged trading is high risk and should have a higher return, otherwise nobody would do it.

          Let's simplify. using all your percentages above.

          Let's start with have $0 (e.g. $100 loan, with $100 in an offset). The earnings would be $0.

          Now if we take a $100 out of the offset and assuming the loan is tax deductible (I.e. need to refinance in such a way), we would pay $4.5 in interest.

          The $100 is used with WBC and returns $8.90.

          The profit before tax is 8.9 - 4.5 = $4.40.

          After tax at 39% it becomes 0.61 x $4.40 = $2.68.

          So you're $2.68 better off borrowing money to buy WBC rather than keeping it in an offset as per the example above.

          This example highlights why people take debt to finance high risk activities. However, if things go pear shaped, you have a debt that needs to be repaid when times are tough.

        • darkchoc on 19/10/2016 - 18:19

          @Newplace:

          Separately, here is another possible way of buying:

          If you had bought $100 WBC without borrowing, your profits after tax would have been 8.9 x .61 = 5.4 which would compare to saving $4.5 had you put the money into servicing a loan, so you would have been only $1.10 ahead.

          This highlights why it is important to consider tax implications in any investment decision.

        • OzFrugie on 19/10/2016 - 18:59

          @Newplace:
          Hey @newplace, thanks for the feedback.
          Your calc is right, it is the same as mine ie. After tax you earn 2.7% based on the example.

          However in my post, I compare it with the "after tax return" you will get if you keep the money in offset account linked to home loan or pay down your home loan as this is what OP situation is.
          The return will be 6.6%.. Keeping or putting money in the offset will reduce the non deductible interests you have to pay otherwise, so it acts as if a "return"

          If you just borrow to invest in shares and not having home loan to compare "returns" then yeah you will go ahead based on the example although by 2.7% "only"

          I think what makes share market rewarding is when say for example currently wbc pays 2 x 94c per share at $30/share annually, so yield is 6.3% fully franked.
          Imagine if you bought wbc when it sold for $20/share, then your yield is 9.4% fully franked.
          That is 1.5x more return.
          So buy low sell high can't be any true!
          And of course there is potential of capital growth.

          Again, happy to be corrected by ppl more experienced in investing or sharemarket.
          I myself just starting out and looking to enter the market but this is my current understanding..

        • darkchoc on 19/10/2016 - 20:30

          @OzFrugie: yep good discussion.

          6.6% is the pre tax earning you would need to acheive a 4% return on an offset. That is a good return. But better to stick to post tax earnings and that is why we should use 4%.

          I think the example needs money to illustrate the differences over a year.

          So for a like for like example:

          Start position:
          1. Loan: $100 at 4% = -$4 over the year.
          2. Offset: $0
          3. ADDITIONAL $100 with which you are deciding what to do.

          Scenario A. Put the ADDITIONAL $100 into your offset. So you have $100 loan, $100 offset. You would have paid $4 interest but instead you pay zero. this amounts to a post tax saving of $4. Overall post tax earnings in the year is $4 - $4 = $0.

          Scenario B. Take that ADDITIONAL $100, using your example of WBC, you would make yourself $8.9 x 0.61 = $5.40 after tax. At the same time you paid $4 interest on the loan as there was nothing in the offset. Overall after tax position, you have earned 5.4 - 4 =$1.40 in the year.

          Scenario C. Complex. This is what you have to do:

          1. Loan: $100 at 4%.

          2. Put ADDITIONAL $100 into Offset: $100 at 4%.
            Overall earning on 1 and 2 is nil over the year.

          3. New investment loan: $100 at 4
            5%.

          4. Invest with WBC: $100 at 8.9% pre tax.
            Post tax Earnings are ($8.9-$4.5)x 61% = $2.68.
            Total earnings after tax are $2.68.

          Scenario A: after tax, earn $0.
          Scenario B: after tax, earn $1.40.
          Scenario C: after tax, earn $2.68.

          So, in summary best scenario using your example is to put additional money in offset, take a new deductible loan (@4.5%) and then invest in shares.

          Phew!!!

        • OzFrugie on 19/10/2016 - 22:34

          @Newplace:

          I get most of your points, except Scenario A.. Why would the post-tax earnings = $0..?
          Shouldn't it be $4 since you 'earn' $4 by not having to pay the $4 interest if you don't put $100 in the offset?

          Scenario C is an example of debt recycling - potentially good way to build wealth
          Although to use this strategy, you'd need to actually pay down your home loan (and then redraw it as investment loan) - cannot work by simply putting the money in the offset as banks won't let you have investment loan based on offset account balance, I think (would love to know if this is possible! - from what you said, looks like it's possible?)

          This won't work well if you plan to make your current PPOR to investment property later on as it will reduce tax deductibility of the property when it becomes IP.

          P.S. I made an error in my original post by saying "put money offset = 6.6% p.a. return after tax".. it should be 6.6% p.a. before tax (assuming 39% tax bracket and 4% home loan). After-tax return = home loan rate = 4% p.a.
          So, it's more like 4% (offset/pay down home loan) vs. 2.7% (borrow to invest in WBC shares - dividend only)

        • prozerran on 20/10/2016 - 00:32

          Agree with you calculations, except where are you going to get a NEW share loan for 4.5%?

          • you can only get a 4.5% housing investment loan (secured to a investment house).
          • you can only get a margin loan secured with your share, and then you are up for margin calls! and much higher interest rate probably 7%+

          This can work if you have existing housing investment loans @4.5% with an offset account (again redraw will not qualify for interest reduction)

        • darkchoc on 20/10/2016 - 07:34

          @OzFrugie: read my scenarios and follow the dollars to see that they are correct.

          You are quite correct in saying scenario A returns 4% post tax on the investment. But then the comparatives are:

          Scenario A: post tax 4% (save $4 interest)
          Scenario B: post tax 5.9% (earn $5.9)
          Scenario C: post tax 6.68% (earn $6.68)

          Where you're going wrong is that you are considering saving interest in scenario A, against positive earnings. Can't deduct 4% in scenario B and C without altering for it in scenario A. Look at my examples again and follow the dollars.

          Another thing as a side note, 8.9% is a highly optimistic return in today's environment where assets are considered overvalued. It doesn't factor in the risk at all. Modeling suggests returns closer to 7% is more realistic, which post tax makes it far better to put money into Offset (risk vs return).

        • OzFrugie on 20/10/2016 - 16:28

          @Newplace:

          I get what you mean.. thanks for clarifying that. Got rather confused between return vs earnings..
          Scenario B should be 5.4% I think? but anyway, I get the point.

          Btw, regarding my other question.. Do you have experience of getting investment loan based on the offset account balance which is linked to a home loan (rather than the amount that has been paid off in the home loan)? I would like to know if it's possible.

        • darkchoc on 20/10/2016 - 16:40

          @OzFrugie:

          speak to your bank and ask them to set up new lending in a new tranche. tell them the purpose is for investing in shares or property. as long as you meet the banks lending criteria for the new loan (i.e. you can demonstrate that you can pay it back via the banks tests) you might be ok to do it via the bank directly. they can set up the new tranche and a new offset account to the trance earmarked for investment.

          otherwise a mortgage broker might be able to set it up for you via a new loan - not a bad idea to see if there are better rates out there!

          its not tied to how much you have in your offset - but that should give you security that you service the new lending yourself without overextending the debt.

          also speak to an accountant so that you set up the paper trail in the best way so there is no trouble with ATO down the track.

        • OzFrugie on 20/10/2016 - 16:54

          @Newplace:

          So the new investment loan does not need a security attached to it (unlike home loan is secured by the property)? Just as long as I can prove that I can service the loan, in theory banks will lend me money to invest, yes?

          What I was trying to achieve was to recycle my non-deductible (bad) debt in my PPOR loan to deductible (good) debt, which is then used to invest.
          But the twist is that the plan is to convert my PPOR to IP down the track, so I dont want to pay down the PPOR loan because it will affect the tax deductibility when it becomes IP later on.
          However, by not paying down the PPOR loan, I cannot really exercise this debt recycling, can I?

          Getting a new loan to invest without doing debt recycling will mean I will have more debts and will become riskier vs. if I get the new loan via debt recycling..

        • darkchoc on 20/10/2016 - 17:56

          @OzFrugie: the additional investment loan I have is secured to my PPR. But it is interest only. It is "good debt" (deductible). The reason I have chosen to secure it is because the rates are much better on secured debt.

          For the "bad debt" (my original debt on my PPR)r, I have set it to a long 30 repayment and I think it is 5 years interest only. I'm posting this down minimally but print everything i can into the offset to reduce the non deductible interest.

          Any profits from our investment property will go into the offset of the bad debt rather than pay back the investment loan.

          Do i make sense? I'm trying to use your terminology.

        • OzFrugie on 20/10/2016 - 22:47

          @Newplace:

          Yep, make sense mate. I got the same setup as yours :)

  • kingsville on 18/10/2016 - 11:35
    +3

    I did this. I set up a split in the home loan to keep it very clear which interest is attributable to the shares and which is for the house. Clearly you would put your offset account to offset your remaining house interest and pay the house loan down first. the other half of the home loan is drawn upon to purchases shares.
    I'm not an accountant, but I don't think you need to get an separate investment loan - that would presumably be at a higher interest rate.

    The reason I did it was to diversify. I didn't want to pick winners on the share market so used indexes such as STW and IOZ

    • blackfrancis75 on 18/10/2016 - 12:29

      thanks. What kind of dividends do you get on those indicies?

      • superbass on 18/10/2016 - 12:42

        http://www.asx.com.au/asx/research/company.do#!/STW

        hope you know how to do research if you are thinking of investing in share market

        • blackfrancis75 on 18/10/2016 - 12:47

          thanks; am I reading this right that the dividend of 5.42% with franking of 87.6% means the rest of the dividend (12%) I have to pay tax on?

        • moar bargains on 18/10/2016 - 13:30
          +1

          @blackfrancis75: Sort of. You have to pay tax on the whole dividend, but you get franking credits from 87.6% (note that % will vary with each dividend) of the companies owned by the fund. You can use these credits to offset the tax you would've paid on the dividend. If you are taxed at >30%, you will still pay some extra tax on the dividends.

          For example, if you get a dividend of $70 (for ease of figures), fully franked with $30 of franking credits, the tax office "sees" this as you actually earned $100, but the company has already paid $30 (30%) of the tax on your behalf. You then make up the difference. Eg. If you're on a 45% tax rate, you'll need to pay another $15, but that's better than paying $45.

          Here's a link that might help explain further: http://www.investors.asn.au/education/shares/understanding-shares/franking-credits/

        • Scrooge McDuck on 19/10/2016 - 12:46

          @blackfrancis75:

          No, it means that for the most recent dividend the franking proportion was 87.6 %.

          So, assuming the franking proportion was constant for the whole year, the annual franking credit yield would be:

          5.42 % * 30 % / (1 - 30 %) * 87.6 % = 2.03 %

[30 % is the corporate tax rate]

          So you add the franking credits to your taxable income but then they are refunded in full. In effect the total return is 5.42 % + 2.03 % = 7.45 %.

    • superbass on 18/10/2016 - 12:37
      +1

      I second this - a good advice especially around investing on ETFs like STW.

      Don't go to broker or fund managers. Most are in it commissions, doesn't really care about your profit at the end of the day, but their profit only.

      One thing I might add is, consider Margin lending if you have $50k cash from redraw. Depends how much you leverage, but all/most of the interest you incur from margin lending will offset with the dividends you will get.

      EDIT: forget what I said about margin lending, just read your comment that you are not going to capital growth

    • blackfrancis75 on 19/10/2016 - 09:53
      +1

      I'd be interested to know what the people who say they're using this strategy have to say about OzFrugie's post above - is he wrong or are you making a loss?

      • kingsville on 19/10/2016 - 11:22
        +1

        When paying off the home loan was in sight, i decided to diversify and use the cheap credit of the home loan.
        I did this rather than pay off the home loan and then start to build a portfolio. a bit of a transition strategy.

        If you are in a high enough tax bracket to service your large mortgage, then the 'after tax' return of paying down your home loan might be the best bet.

        I'm a risk averse person and didn't think it was a particularly risky strategy. The dividends are covering interest and I am happy with my diversification of assets (shares and house). I'd do it again.

        If the share market tanks or the property market tanks then we are all kinda screwed anyway.

    • darkchoc on 19/10/2016 - 18:21

      What are your thoughts on diversified exchange traded funds ETFs?

      I really feel like I won't know better than the market, so would want a diversified investment, with low fees.

  • Youfah Mizzum on 18/10/2016 - 12:05
    +2

    I have done this too.
    As Kingsville says, keep a clear distinction between how much of the home loan is attributable to the house, and the other for your shares.
    So if you owe $690K, and you draw down $50K to invest (you don't need to tell anyone the reason afaik) then 7.2% of the interest you pay on the mortgage is tax deductible.

    Obviously whatever interest rate you're paying on the mortgage, you need to invest a few percentage points higher to really get any decent benefit.

    When I did it a few years ago, I think interest rates were around 8% and my investment - just in managed funds - was earning around 15%, fluctuating each month between around 5% and 25% but in general I was ahead.
    I didn't do it for diversification, my motivation was more cash!

    • idjces on 18/10/2016 - 16:04
      +2

      To further clarify, use a separate split as Kingsville said. If you mix an investment account and non investment account, then every $ in and out has to be proportioned to the original mix, it's a nightmare.

      If you owe $690k and redraw $50k, $50k is deductible.

      If you deposit $1000 from your salary. Your 740k will now be $739k made up of $689,073 non deductible, and $49927 deductible.

      You'll also need to keep detailed notes on how the interest charges change, every time you invest further funds.

      Use a separate split.

    • blackfrancis75 on 19/10/2016 - 09:53

      I'd be interested to know what the people who say they're using this strategy have to say about OzFrugie's post above - is he wrong or are you making a loss?

      • idjces on 19/10/2016 - 15:23

        You don't deduct the loan servicing cost when comparing, you aren't borrowing more funds to invest.

        You are choosing to either put $1000 against the mortgage, or $1000 into shares.

        4% tax adjusted (6.6% gross) return on paying off the mortgage.
        5.43% tax adjusted (8.9% gross) dividend in WBC.
        6.38% tax adjusted (10.46% gross) dividend in WBC, assuming 8.9% gross and you have 'gained' a eligible interest deduction repurposing existing debt.

        • darkchoc on 19/10/2016 - 21:18

          This.

        • idjces on 19/10/2016 - 21:34

          Actually i think my maths might still be bad.

          Income 8.9% gross.
          Remove 4% expense.
          Taxable income 4.9%, marginal tax deducted of 1.91%, down from 3.47%

          8.9% dividend - 1.91% tax taken = 6.99% in the hand

          Scale that up to compare with pretax income, would be 11.46% gross

          6.99% tax adjusted (11.46% gross), with an eligible deduction

        • OzFrugie on 19/10/2016 - 23:16

          @idjces:

          Apologies for my ignorance, @idjces, but why "8.9% dividend - 1.91% tax taken = 6.99% in the hand" ?
          Shouldn't that be subtracted by the 4% Expenses since you need to pay 4% interest, so = 2.99% in hand ?

        • idjces on 20/10/2016 - 01:15

          @OzFrugie:

          Well yes, but i'm assuming you would be paying the same 4% interest before and after buying the shares, so have not deducted it.

          You choose between

          Paying down the mortgage = 4% in the hand (as a reduction in interest paid)
          Invest that money in shares = 6.99% in the hand (net income increase of 6.99%, same interest paid).

          Overall net difference between those two methods is 2.99%, ignoring movements in share price.

      • darkchoc on 19/10/2016 - 21:21

        In relation to ozfrugie's post, please see my responses to his post.

  • Trying2SaveABuck on 18/10/2016 - 13:57

    I currently do this, however I don't do the investment loan thing because you will be looking at 5.5% interest and my loan is under 4% but it isn't a bad idea.

    I agree stocks aren't normally a short term (ie Under 12month) investment. But low risk stocks will probably out do your home loan rate I own ANZ shares and a few other equities.

    It depends on your situation like everything when it comes to investing. Im 26 and trying to build a balance porfolio of Cash, Stock and property and happy to take a little risk.

    If you are closer to retirement i'd advise you just pay off you property because you might not have the years to make back any possible loss considering the Australian economy hasnt had a recession in a long time.

    My advice would be to seek financial advice that isn't someone who gets commission for selling you BullS*** but is actually working to make you $$$

    As for shares if you do go into it do your research and keep a well diversified portfolio across a number of sectors.

    • cameldownunder on 19/10/2016 - 13:18

      "As for shares if you do go into it do your research and keep a well diversified portfolio across a number of sectors."

      I disagree. You need knowledge of what you buy. Diversified portfolio is impossible to keep informed about, if not as main profession.
      I compare the 'investing in diversified portfolio' like placing your bets on Red-Even-Pass at Roulette. Then hedge it by putting a bet on 0 ("Zero").

      • Trying2SaveABuck on 19/10/2016 - 14:37

        The scenario about betting on all 3 makes no sense because there are 1000s of stocks on the ASX and you obviously aren't going to put money into all of them but you might be looking at say 5 different stocks (10k each) in a few different sectors.

        There is ample research to say diversification is the best way to invest but you need to buy the right companies and at the right times.

        HOWEVER this is all void if you are a day or short term trader

        • dtc on 19/10/2016 - 16:13

          No, diversification is the LOWEST risk way to invest. Not necessarily the BEST way to invest, because you always limit your profit (in return for lower risk, of course). The best way depends on your intentions, risk profile, timeline etc

          eg: an individual share may vary (even a blue chip) by 20% over a year. The stock market as a whole might do 5%.

          Pick the right share and you make 20%. Diversify and you make 5%.

          Pick the wrong share and you lose 20%. Diversify and you make 5%.

        • Trying2SaveABuck on 20/10/2016 - 06:46

          @dtc: yea i'd agree that with that but in the blokes comment his 1st point was he wants Low Risk.

        • serpserpserp on 21/10/2016 - 21:04

          @dpgrubesic:

          If they want low risk there is no point investing in shares. They should stick to paying down that mortgage and saving themselves 4%.

          BTW OP & others, stop thinking about Bank dividends in isolation in your investment. you might think a 8% gross yield is great but if the share price trends downwards it is only a matter of time before your yield will go down (due to cut dividends) which then propels further price drops which is kind of a double whammy (then you have to wait possibly years to recover while you are paying interest on something that earns you no money AND has lost you savings!)

          At least if you pay down your mortgage and property prices tank you can still move out and earn some cash via renting your house out (because in Australia the rental market is never going to see a huge crash).

        • Trying2SaveABuck on 28/10/2016 - 11:29

          I'd agree with that just offset the money is probably the safest way

    • prozerran on 20/10/2016 - 00:35
      +1

      You should check with a qualified accountant because I believe you cannot claim a tax deduction for the loan as it was originally taken out for personal principle place of residence and no investment purposes (even though you are now using $$ for investment).

  • Lostatsea12 on 19/10/2016 - 08:23
    +1

    I am not an accountant BUT

    You need to consider pre and post tax dollars.

    You pay your mortgage in post-tax dollars so whatever you are saving in the offset account you need to add your current tax rate too.

    With share returns they are pre tax (albeit SOME have franking credits of up to 30cents in the dollar) so you will pay tax on them.

    If you assume the highest tax bracket (for the sake of this argument) you are effectively earning circa 7% on the money in an offset account, if you get dividends that are 7% even fully franked you will still pay 17 cents in the dollar tax (top tax rate minus franking credits).

    Very few shares are giving 7% dividends (put aside capital growth because that is another argument with the family home being exempt etc)

    Even in this low interest environment, I believe the general consensus is to leave money in a home and then save money (or borrow elsewhere) to buy other investments and diversify.

    I have a largish (for me) share portfolio with a margin loan service, Your returns can be increased BUT your losses can as well.

    As I said, a very general opinion from a layman, don't know if any of it will apply to you.

    • darkchoc on 19/10/2016 - 21:45

      I agree.

      A. Firstly reduce non tax deductible debt (via offset) for a very low risk, relatively high return on the investment (e.g. 4% post tax - which may compare to 7% pre tax for some people).

      B. buying high risk investments without being tax favoured, would be expected to yield very similar results to putting money in offset (e.g. 7%-8% pre-tax or 4-5% post tax) with much higher risk than the offset. it does however diversify from real estate. But is the reward worth the higher risk? Not in my books.

      C. But, subject to your risk tolerance and affordability, purchase investments in a tax favoured position (e.g. release equity from home for the amount that you put into Offset, or via superannuation). This is potential higher reward with a high risk of course. This may also assist in diversifying away from real estate. This is the way to take on more risk but keep it to what you would have interested directly to keep yourself honest.

      The key to any investment decision is to look at the money in the pocket (post tax). Also consider long term objectives and shock tests e.g. what if you weren't able to work for a year or what if equities were to drop by 20pc.

  • ROTJ on 19/10/2016 - 08:47
    +2

    Whatever the source of finance eg redraw, separate loan etc: ensure it is clearly identifiable to the shares you purchase. And keep it separate and distinct. I know of people who have a line of credit they initially used for share purchases, then drew down to update their car, sold some shares, drew down to go on an overseas holiday, bought some more shares, paid a chunk of the LOC. Over time, it becomes a dog's breakfast and almost impossible to identify the allowable tax deduction for the interest pertaining to the shares component. Keep your "shares" loan separate from everything else!

    • Skramit on 19/10/2016 - 11:38

      This is precisely the reason I organised a separate loan facility for my investments rather than splitting or doing manual calculations on my home loan.

  • Peck on 19/10/2016 - 10:27
    +1

    Share market is flat, even with the artifical support of low interest rates, and people piling into the market chasing better returns than bank rates, FTD, etc. I believe that we are 1 step from a recession, 3 steps away from a depression. Do not use the share market as a giant casino. In either case, "Cash is King". IE DONT!

    • Trying2SaveABuck on 19/10/2016 - 14:42

      With that mentality you should not buy a house, never buy a car, never start a business, dont put money into super etc

      No one knows when we will go into a recession but historically the ASX has always risen in the long term(As has the property market) this includes periods such as World war 1 and 2.

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