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Property Investment Debt- Principal and Interest Debt or Interest Only?
CALCULATING HOLIDAY PAY
Before calculating your employee's holiday pay you need to work out the gross amount payable to your employee. Go to the Department of Labour's website at www.ers.govt.nz for more information and on online tool to help you calculate holiday pay entitlements.
To calculate how much PAYE to deduct from your employee's holiday pay go to www.ird.govt.nz write "Work it Out" in Search, keyword "PAYE". " Calculate tax on holiday pay- 2010" You can print a copy of the calculation with your employee's name and IRD number. Include holiday pay in the period that you actually paid your employees.
PROPERTY INVESTMENT- PRINCIPAL AND INTEREST DEBT OR INTEREST ONLY
If you are investing in property and all your debt is tax deductible, then it depends on your attitude to risk, and your proposed portfolio growth , as to whether you should be funding only interest free debt, or principal and interest.
The more aggressive you are, and depending whether you want to accumulate a portfolio of several properties, the more likely it is that the debt will need to be interest only. This will ensure that properties can be accumulated without over-committing your income in the eyes of the banks. You obviously have to pay debt back eventually, but on this basis you can pay it back upon downsizing your property investment portfolio
Alternatively, you can consider paying back progressively by making principal and interest payments over the life of building your portfolio.
Features and benefits of principal and interest debt payment are as follows:
pay less interest
lower financial risk
pay off mortgage quicker
Features and benefits of interest debt payment are as follows:
better tax refund (or less tax to pay)
accumulate more property sooner
improved cash flow
Principal and interest payment is cheaper, but paying principal and interest debt can sometimes mean outgoings are too high to enable you to borrow further. If, for example. the property investor pays interest only, then the purchase of another property may be affordable. Many investors also believe too that the potential capital gains to be made by accumulating more property can also outweigh the cost of paying more interest.
WHAT ARE LOAN TO VALUE RATIOS?
Loan to Value Ratio or LVR is the amount of your borrowings divided by the
value of the security (your home), expressed as a percentage.
example, if your new home is worth $300,000 and you have a loan of $240,000;
your Loan to Value Ratio (LVR) is 80%.
LVR is really the reverse of your equity. If you have a LVR of 80%, this means
that your equity (how much you own in your home) is 20% of the property’s
what’s important about Loan to Value Ratios? Well the higher the LVR, the
more you owe on your home as a percentage of its value and the more risky the
bank sees your loan as being.
Banks tend to determine the maximum LVR they are prepared to advance depending on the type of property you are buying (residential , commercial, apartments may require different LVRs). Also location of the property may come into consideration. And of course your credit record and past payment record.
IRD has a revamped website relating to Student Loans. There are tools to help keep track of your loans, and information about paying it back, both in NZ and overseas.
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