Most Australian expatriates remember how expensive our home mortgages were when we were living in Australia, as there was no tax relief available for interest costs on our private home.
While you are an expatriate, things are very different.
When you are renting the Australian property out, all interest costs are fully tax deductible for you in Australia, however any additional repayments that reduce the balance of your loan are not a tax deduction.
An interest only loan will always be a lower monthly repayment, which can make it easier on your cash flow.
It is not a case that you are best to always be in debt, rather you need to understand the importance of being debt free or low debt on property in Australia when you are living in it, not while it is rented. As an expat living in the property is not an option until your eventual return.
While a property is collecting rent in Australia any loan that was taken to help with the purchase is fully tax deductable, even if you had lived in the home for some time in the past. With rather high tax rates for non residents, starting at 29%, then the tax deduction is usually very welcomed.
You should continue to accumulate funds in order to be able to pay the loan off at some future date when you actually move in. Doing it earlier can cause grief on return if you choose to live in a different property to the one you have been paying off. In this case you may be forced to sell a quality investment just to release the cash to assist with being low debt on the new property.
Paying off the principal of any loan should never be considered a bad thing to do, just perhaps not the most efficient use of your money while the property is rented.
If you have a loan sourced from Australia, an alternative to repaying the loan is to use an “Offset” account, where an account with your savings in it is linked to your loan and you are only charged interest on the net balance. This achieves exactly the same savings as extra repayments however leaves the loan balance unchanged and gives you far greater flexibility as you can withdraw your funds from the offset account if a better option comes along later.
You may be surprised to learn that the overall performance of your property investment will be improved when you have a higher loan against it. This is a combination of reduced taxes and leveraging benefits that in some cases can almost double the rate of return achieved after tax each year.
As a result, delaying the decision to reduce your loan until the date you move in could prove to be a very rewarding decision and set you up in a stronger financial position on your return to Australia.
Our customised “Property Tax Estimator” can quickly demonstrate the advantages of cost implications of reducing your loan, taxation issues and investment performance considerations. It is available free on our website at www.smats.net
