@jansina To add to this another benefit is if you have an offset or redraw facility. If you dont due to the size of your mortgage maybe worth contacting a broker and see if they can get you a better rate with an offset account
@bootsie1 You pay income tax on income you earn from investments, for example, interest on deposits, rent from rental property and dividends from shares. You pay CGT when you sell an investment.
The 6%/10% thing is roughly correct, the important point is that reducing your PPOR mortgage loan means you save interest and since you had to pay that interest out of after tax income it saves you a greater amount of pre tax income.
@maryanne62 Interest rates currently 6% and any profits from investments would be added to their taxable income and likely push OP to a higher tax bracket (likely around 4% higher)
@xxxfokaxxx People fixate too much on a higher tax bracket. You go from just under 120k to 125, and you pay an extra 4c on the dollar for that last 5g, or $225.
@jansina So, I think the returns on the investment need to be lower than the interest rate to "break even", assuming you debt recycle. That's because a chunk of your interest becomes tax deductible.
If you can get the same 6% return, then that probably includes your required risk premium. If you do better than 6%, that's gravy.
That's because by debt recycling, you get a 45% of the interest on the amount bonus to start with from the government.
@evh If you earn 10% on $1000, it's $100. But at the highest tax rate, you only get to keep $53 - the other $47 goes to the tax man.
If you save 6% on $1000 in your mortgage, it's $60 interest you don't have to pay. Plus, because it's not income, there is no tax to pay. Plus, you get ahead on the mortgage, which saves more compounded interest over time.
Let's say you invested it in an index that returns 10% for the year. You haven't sold it and have continued to hold that investment. That is also not taxed at this point.
Why would we be grossing up interest saved on mortgage to how much of your pre tax income it's saved? Sure, if you have it in a savings account it's going to be taxed at your marginal tax rate, but it's not like that is the only option.
@evh Yeah the 10% statement only works when in direct comparison to a HISA. And in that case, its still misleading since they really should state HISA is "rate minus tax", not that home loan is "rate plus tax benefit".
I guess if we're just talking gaurenteed returns, it's a little a more valid.
@evh What you have there is an unrealised capital gain. It's going to be taxed at your marginal tax rate when you do eventually close the position. For a true comparison, you need to assume the investment would be taxed in the same period - because it has at least incurred that tax during that period, paid or not.
But also, I didn't gross up the amount saved on the mortgage. In my example, I assumed the $1,000 initial investment was post-tax dollars, & then only applied the tax effect to the earnings/savings.
The other poster was suggesting to gross up the percentage, to compare both of the earnings/savings amounts in pre-tax dollars. Same end result, different methods of calculating.
@eqhsk It depends on the nature of the investment. Some investments are held for their capital growth potential and you don't pay tax on those until you dispose of the asset and pay CGT on the gain in value, usually discounted by 50%.
Other investments produce an income stream - e.g. rental properties, savings accounts, shares in companies that regularly pay dividends etc - on on this income you pay income tax.
@jansina This is the answer. For transfers. Wise is popular and low fee. If you transfer with a bank you should be able to get down to 50bp. Do NOT use standard transfer between accounts you will get charged 4-5%
