Mortgage Elimination Strategy
Case study
Nick and Libby have a combined income of $100,000 per year
(Nick earns $85,000 and Libby $15,000).
Their home is valued at $350,000 and they have a $100,000 mortgage
that they expect will be repaid in 15 years (current repayments are $900
per month). They would like to repay the loan sooner.
A Mortgage elimination strategy utilising FEA Plantation Investments
can reduce the mortgage balance faster, significantly reducing the term
of the loan and hence the amount of non tax deductible interest payable.
Nick and Libby attach a separate line of credit facility to the home
loan, using the equity in the home to fund a FEA Plantation investment
of 4 woodlots ($13,200 inc GST) in Nick’s name.
Nick registers for GST and receives a GST refund amounting to $1,200.
The investment generates a taxation refund of $5,820 which along with
the GST refund can be paid directly into the balance of the mortgage. Of
course, the interest on the line of credit will need to be funded as
well. This would amount to approximately $924 in the first year assuming
an interest rate of 7% pa.
As this is tax deductible the “after tax” cost is only $476. This
investment strategy can be repeated each year until the mortgage balance
is eliminated.
Benefits
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• |
Nick & Libby
eliminate non-deductible mortgage debt in 7
years instead of 15 years. |
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• |
$33,555 in non tax deductible interest saved due to this term
reduction. |
|
• |
Additional accumulated outlay required to fund investment loan
interest after tax only $13,328 over this period. |
|
• |
Existing mortgage
repayments can then be diverted into investment debt along with future
net harvest proceeds. |
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situation and particular needs of any particular person.
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