Yes, sorry I did mean an offset account. If I can withdraw from it, I can add around 35k a year.extra till its positive geared.
You know what, that’s actually a common misconception. An offset account is only fantastic if you have a lot of cash sitting idle in your bank account. If you went to a bank, you’ll find that an offset account typically has a higher interest rate compared to the standard mortgage rates – if you’re depositing $300-$400 cash into the offset per week, on an annual basis, the impact to reducing your interest rate is negligible. Furthermore, there are often annual fees on top of it that you’ll need to consider. Furthermore, interest free period are not forever -and once the interest free period ends, you’ll need to start paying your mortgage at the higher repayment amounts.
On top of that, the danger is, if property prices ever fall and lending criteria’s tighten (god forbid), then you haven’t got an equity buffer there.
On the other hand, if you reduced your mortgage and you wanted to buy your home, then you can obviously use the equity created from paying down the debt to borrow for the next property right?
It’s always best to compare and contrast – take the time and do the maths to make a smarter decision.
Hi Jason
What about my example where the loan is paid down by $100,000. If S then later wants to buy a place to live in then what would happen?
eg. 1
$100,000 would be availabe for redraw. S takes that money and uses it as deposit for the new house. But since this is personal borrowing the interest on the $100,000 would not be deductible.eg 2.
$100,000 had been paid into an offset account instead of the loan. He takes this out and the interest on his investment loan would increase. That would mean the equivalent of obtaining a tax deduction on $100,000.
The interest on $100,000 is approx $7,000 pa. If S was on the top rate that would mean saving of around $3000 pa in tax.Now imagine the exponential effect and image the added effect if the amount was larger.
Assuming S is not a spendshrift and can control his urge to spend the large amount of money in the offset, keeping the money there instead of in the home loan result in the exact same amount of interest savings.
The only difference is that he may be able to get a slightly cheaper rate by having a cheap no frills type loan with no offset facility.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I see where you’re coming from Terry and an offset account is great for its flexibility. But the $100,000 paid down on the loan could be used as equity value / security to be borrowed against for the second property. I don’t think it’s a limitation. Having said that, the offset account is still a viable option if you have $100,000 sitting around doing nothing. But if you’re paying $300-$400 to your account per week based on what’s left over after your living expenses, the benefits are negligible given that offset typically charges a higher interest rate vs standard.
As always, depends on the circumstances and best to run the numbers and compare.
Even if you had small savings it all adds up and makes it more tax efficient. offset accounts will save you daily interest too. $100 in an offset for 1 day will save approx 7 cents per day. Add to this the interest on interest getting bigger each day. This may not sound like much, but imagine with a balance that is rising and compounding.
Add to this the tax benefits.
But, you generally only need one offset account. So you may have one on your home loan (PPOR loan) or first investment if no home loan and then can have a cheapish loan on your other investments.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw wrote:Hi JasonWhat about my example where the loan is paid down by $100,000. If S then later wants to buy a place to live in then what would happen?
eg. 1
$100,000 would be availabe for redraw. S takes that money and uses it as deposit for the new house. But since this is personal borrowing the interest on the $100,000 would not be deductible.eg 2.
$100,000 had been paid into an offset account instead of the loan. He takes this out and the interest on his investment loan would increase. That would mean the equivalent of obtaining a tax deduction on $100,000.
The interest on $100,000 is approx $7,000 pa. If S was on the top rate that would mean saving of around $3000 pa in tax.Now imagine the exponential effect and image the added effect if the amount was larger.
Assuming S is not a spendshrift and can control his urge to spend the large amount of money in the offset, keeping the money there instead of in the home loan result in the exact same amount of interest savings.
The only difference is that he may be able to get a slightly cheaper rate by having a cheap no frills type loan with no offset facility.
Totally agree and I'm 100% with Terry on this one. I see it all the time – clients wanting to convert their current PPOR into an IP but have paid down so much of the principle that the remaining portion (the deductible debt) is extremely low compared to their new non-deductible PPOR debt.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
My aim is to buy an investment soon, 350k ish. Then use to to buy my own home to live in, in around 5 years. I am happy to rent in the mean time due to work.
I agree with your accountant, look for a new home. More deductions and you get the full 1st home buyer grant. Plus if it's off the plan, less stamp duty as well.
agreed with Terry 100% here also. Don’t pay the loan down, just use the offset account. It only makes sense
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