Suggestions on paying the interest borrowed to invest

[bonkerrs]

I am wanting to borrow money from the bank to start an investment portfolio. To do this I'm after some ideas on how I can repay the interest without digging into my limited savings. If this is possible.

Lets say I borrow $100k at a rate of 6.5%. I would need to cough up $6,500 p.a to meet the interest repayments. I am looking to invest long term so there wouldn't be any return derived from the $100k for a few years. I'm only wanting to do this if there isn't an impact of $6,500 out of my pocket every year.

My understanding (or misunderstanding): If the interest is tax deductible after completing my tax return should I receive the $6,500 in deductions? If so, I could put that aside to pay the interest in the following years. So I would just have to afford the first year's interest?

I apologise if this may come across as a stupid idea (or it may be possible), at the moment I don't know.

Been thinking about this for awhile so here it is, hoping to get some advice.

More info: If I go ahead I will be investing through a discretionary family trust.

Thanks!

 

[VSntchr]

EDIT: The total interest is tax deductible! This means that your taxable income will be reduced by the amount of interest expense.

Also, depending on what shares you invest in, you may be able to achieve dividends which will help you pay the interest expense. Note that any income, such as these dividends, will need to be added to your income for your tax return.

 

[bonkerrs]

EDIT: The total interest is tax deductible! This means that your taxable income will be reduced by the amount of interest expense.

Also, depending on what shares you invest in, you may be able to achieve dividends which will help you pay the interest expense. Note that any income, such as these dividends, will need to be added to your income for your tax return.

I guess it's a "want" that everyone would like. Thanks just thought I'd ask it.

 

[joku]

I guess it's a "want" that everyone would like. Thanks just thought I'd ask it.

Firstly, tax deductible means its deducted from your income before tax. If you've made a $6500 investment loss and you're up in the 40% marginal tax bracket you're reducing your tax bill by 40% of $6500 = $2600. But it still isn't that simple because your investments will also earn income normally and that adds to your taxable income. If the income they earn is $6500 grossed up (ie. including franking credits) then you have no net tax effect, this is just logical because you have no net income effect. If the net income effect is positive you pay more tax, if it is negative you pay less tax, but don't forget that higher income isn't exactly a bad thing. In summary, you may not have a net negative cash flow to fund through other means (savings) but it doesn't all happen the way you made it sound.

Secondly, there's catches regarding discretionary trust profitability and franking credit retention - the credits vanish if the trust doesn't turn a profit without them after deducting the loan interest. Considering you're looking at a relatively high interest rate and I assume also a high debt/equity you will be at risk here, losing franking credits would generally be horrible news!! Besides that, you may incur higher accounting fees by running a trust and may or may not get any advantage from it any time soon. Best talk to a decent accountant, they should be able to figure out if a trust is suitable as quickly as you can provide all your personal details.

Thirdly, if you have equity in property you will be able to get much better than 6.5%. I have an tax deductible investment loan secured against my property that I on-loan to my trust, it's a $300k loan at 4.64%, no fees, no margin calls, interest only and with a 100% offset account attached so it acts like a line of credit that can be efficiently drawn down as and when I choose. The key here is that ATO cares about what the loan funds are used for when determining tax deductibility, where as banks cares about what the loan is secured against (ie. their risk) when determining interest rate etc, yet another topic that your accountant will be able to help you with if applicable.

 

[Pnut]

Hi Bonkerrs,

Lets say I borrow $100k at a rate of 6.5%.


I would say your biggest concern is how you are going to pay back the $100,000 if it all goes bad.

If you are prepared to pay $100K for investment how much have you spent on acquiring knowledge first.

How much do you believe it will cost for you to become competent, to the point of being able to make a return greater then the professional fund managers etc whom have years of experience.

At what level of loss do you quit trading, close your trading account and repay the money then go out and get that second job to cover the loan and the interest. Is it $50,000 or more or less.

If you wanted to have a go at playing with the big bucks. Consider opening a $500 account with a FX broker who Guarantees your account not to go into debit. $500 will give you at least $100,000 line of credit. Usually $1 or $2 trades each way and have a go when your account hits the magic $5000 mark you are good to go. That would be when you start to worry about tax and interest etc.

My thoughts Only.
Thanks Pnut.