You hear the journalists talk about the Reseve Bank Lever as if it is a magic handle that the RBA raises or lowers to increase or decrease the cost of funds for the banks.
See the attached graph that shows the official cash rate over the last 30 years. We are coming from an all time low, and you can expect more increases in the short term.
(Jessica Wang News.com.au Jan 25, 2023)
Have you ever wondered how all that works? One think for sure is that you have no control over interest rates. But there is a way to control your costs so, that you can easily afford the increases as they are passed to you by the banks.
What if you had your own lever and you could control the outcome. Well there is such a lever and its called ‘taxable income’.
If you can lower your taxable income (while maintaining your gross income), then you will pay less tax and you will have more money to pay the mortgage.
How does it work? (assuming that you are employed, and if applicable, your mortgage interest rate is as low as you can get)
Step 1. Understand your tax status
Put yourself in one of these categories
Buying your own home with savings
Buying your own home with investments (Property, Shares)
First Home Buyers
In general and across all categories, if you can reduce taxable income then you will pay less tax, and this will help you weather the interest rate storm.
Buying your own home with savings
Your first option is to seek to repackage your salary. Approach the boss or try to change your role to a more favourable package with greater tax benefits. e.g. car allowance, gym fees paid, school fees paid. get creative and look for benefits that can be paid before tax.
The second option is to pay down your mortage with savings. If you are on a redraw then you can get these back later for emergencies.
A third strategy is to borrow more and invest in property or shares that in the short term show a negative return. While this may increase your outgoings, it will pay for your mortgages in pre tax dollars. You can apply to the ATO to have your tax savings applied each pay period. Talk to me.
Finally, use your savings to increase your super contributions to a maximum of $27,500 per annum. Tax will be deducted at 15%, and not at your marginal tax rate, your contribution is a tax deduction, and your wealth will increase.(assuming a performing super fund).
The deployment of options or a mix thereof is entirely individual related. All I can do is point out the options and get you thinking. Talk to me about the tax consequence of your decision.
Buying your own home with investments (Property, Shares)
Your first option is to seek to repackage your salary. Approach the boss or try to change your role to a more favourable package with greater tax benefits. e.g. car allowance, gym fees paid, school fees paid. get creative and look for benefits that can be paid before tax.
The second option is to pay down your mortage by selling your investments. If you are on a redraw then you can get these payments back later for emergencies or other investments. Pick the dud shares that on sale will realise a capital loss, then offset your losses with the sale of a share that realises a capital gain. Your net cash flow should be used to pay down the mortgage. N.B. The key is to realise the most cash to pay down the mortgage. Capital losses cannot be used to offset taxable income, but can be used to offset capital gains.
Check your investments tax status and see if you are claiming all expenses of the investment. The funds invested in a rental property or share portfolio may be a combination of borrowings or personal funds. The interest on initial investments is deductible. If your personal funds come via a redraw facility, the interest on the capital invested is deductible.
Finally, use your savings to increase your super contributions to a maximum of $27,500 per annum. Tax will be deducted at 15%, and not at your marginal tax rate, your contribution is a tax deduction, and your wealth will increase.(assuming a performing super fund).
The deployment of options or a mix thereof is entirely individual related. All I can do is point out the options and get you thinking. Talk to me about the tax consequence of your decision.
If you are a first home buyer, then please see my November and December 2022 posts. They may help you in these times to understand the interest rate situation.
Step 2 Consult professionals before you enact a decision. The fees are tax deductible.
If you a client of Harbour Accounting, then talk to me. If you dont have an accountant, then I urge you to find one. The fees are deductible and the money spent will be worth it.