Snapshot at an Inflection Point

Now the house purchase is complete * and we are starting a new financial restructuring plan I thought of drawing up a balance sheet as a snapshot of this "inflection point". It's in a different format to anything I've done before as it is based on the various accounts things are in and how flexible they are rather than asset classes and beta and other investment theory things I've considered in the past. This is all in Australian Dollars:


Long term assets are retirement accounts, checking, saving, cash, and credit cards are short term and everything else is medium term as it can be restructured/sold/closed etc. but probably won't be done fast. So, the goal now is to increase the size of the offset account until it is the size of the mortgage. In the meantime adding a bit to some investments  - we still have $2000 of automatic savings a month outside of retirement accounts for example - and increasing the margin loan. Then one day in a few years there will be a flip - pay off most of the mortgage, redraw the mortgage, then pay-off the margin loan and make investments.

BTW, if you're wondering why we have a thousand dollars in Australian Dollars cash, a big chunk of that is a travel money card.

 * As you can see from the balance sheet we still didn't get the deposit on our apartment back, so everything is not yet settled.

Redrawing Mortgage for Investment Purposes

Following up finally on comments that bigchrisb made about paying off the mortgage faster and then redrawing the money to investment in shares/refinance margin loans. This appears to be the ATO ruling on this. So, there is no problem to do this, but I have been thinking about the practicalities. It seems to me that if you pay off say $50k of the mortgage and then withdraw the money for investment, then the next $50k you pay off just repays the redraw and so your tax deductible loan gets no bigger. So, it only makes sense then to do the redraw after paying off as much of the mortgage as you want in the long term before doing the investment loan. So, in the meantime I think we will continue to accumulate money in the offset account, which gives more flexibility. If you are wondering why we should pile up cash while having a margin loan, actually the effective untaxed interest on the offset account is higher than the after tax rate on the margin loan. So, it makes sense to borrow more on the margin loan while piling money up in the offset. I think I will stop automatic re-investments of distributions and dividends where there is no discount for re-investment to speed the process a little. The only one I think is with my Colonial First State funds. When we are nearer an amount I think is reasonable then it would make sense to actually sell investments and add that money to the pile. But that should be a final step I think. I do have a lot of tax losses so that the first $60k of capital gains is tax free. This will be a project over several years. Of course, maybe in the end we would take the cash pile and use it as a downpayment on an investment property instead :) So, lots of things are possible.

P.S.
For U.S. readers who might wonder about why go through this complicated plan.... in Australia, mortgage interest is not tax deductible for owner occupiers. But investment interest is, even if it exceeds the income on the investment so that you make a net loss. The latter is known as "negative gearing".

P.P.S.
From March on, I'll include the implicit saved mortgage interest as part of investment return. That means that it also needs to be included in the "transfer from current account to housing" and included in housing expenses in the account in order to balance all the books. I'll also include the "core housing expenditure" in the accounts which will be the actual interest paid to the bank.

Moominvalley Monthly Report March 2015

The Australian Dollar resumed its fall from 78.09 US cents to 76.24 US cents. World stock markets fell. The MSCI World Index fell 1.49%, the S&P 500 1.58%, and the ASX200 only 0.06%. In Australian Dollar terms we gained 0.50% and in US Dollar terms lost 1.88%. So we underperformed both the international markets but outperformed the Australian market. Actually because some stocks went ex-dividend this month but pay the dividend next month we did a bit better than this and outperformed all markets. But I can't be bothered to do the fussy accounting needed to account for dividends not yet paid.

Commodities and hedge funds were the best performing asset classes in our portfolio with Platinum Capital the best individual fund and Winton Global Alpha Fund second in dollar terms. Medibank Private was the worst individual performer losing $1690 in total.

However net worth rose $5k to $1.277 million not counting housing equity and fell $US20k to $US0.973 million. Including housing equity net worth rose $6k to $1.473 million ($US1.123 million). The monthly accounts (in AUD) follow:


Current non-investment income (salary etc.) was $13.6k and retirement contributions were $3.2k.  Total investment returns were $6.4k. Spending on the current account remained very elevated at $13.9k, which house painting and moving among other expenditures. Taking out the cost of moving (but not painting) and some business expenses that should be refunded it was a bit lower at $11.8k. The $2189 spending in the housing account is mortgage interest, while the $3,179 is our mortgage payments - so we paid back net $990 of our loan.