All Topics / The Treasure Chest / Mortgage offset accounts.

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  • Profile photo of GRAHAM_3GRAHAM_3
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    @graham_3
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    Can anyone explain to me what mortgage offset accounts are, how they work and how you set them up etc.?

    Thanks!

    Profile photo of vik_famvik_fam
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    @vik_fam
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    A mortgage offset account reduces the amount of interest you pay on your loan. A broad example is:

    Let’s say you owe $100,000
    Let’s say you have $20,000 in your offset account
    Let’s say the offset is a 100% offset (ie. it offsets the whole interest rate, as apposed to a portion of the interest rate)

    Then you pay interest on $80,000

    These are a facility offered by many banks as part of a package. It’s not normally something that can be added to an existing loan.

    Do you have a loan yet? Or are you looking at options?

    Victoria
    [email protected]

    Reason can answer questions, but imagination has to ask them. — Ralph Gerard

    Profile photo of GRAHAM_3GRAHAM_3
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    @graham_3
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    It was just one of those curiosities that needed answering.

    Profile photo of RENEE2003RENEE2003
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    @renee2003
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    Victoria I think I need some advice from you.

    I am just about to rent out my townhouse which will make a return of around 10% so I will be making a small amount of profit each week. I am going to be renting a house for next to nothing so what should I do with my extra money that I will be making, put it into my investment propety or have a morgage offset account?? I would like to buy another investment propety by the end of the year.

    Thanks

    Profile photo of vik_famvik_fam
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    @vik_fam
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    Hi Renee,

    Let me start by saying that a financial adviser or your bank are the people to speak with for specifics, however I can certainly offer you my opinion.

    Depending on the way your loan is set up, it generally makes no difference whether you put money straight into the loan, or park it in the offset. If the offset is 100%, then the interest charged is exactly the same as if it had been deposited directly into the loan.

    Normally, on any account with an offset facility, you will be able to redraw your advance payments. ie, if you pay $1000/month and your minimum payment is $800/month, each month you will go into advance by $200. So after 1 year, you will have $2400 advance payments. Your bank will normally let you redraw this amount.

    As a comparison, if your minimum is $800/month, and you deposit $800/month into the loan and leave $200/month in the offset, the interest charged will be exactly the same, your loan will not be in advance, but you will have $2400 in your account at the end of the year.

    Basically the same. The one thing I see as being different, is that money in your offset account can be drawn at any time, ATM, EFTPOS, BPAY etc, so it is easy to p*ss it away without being aware. Money left in your loan needs to be drawn out. Most banks have a minimum (say $1000 per drawn down) and charge fees (say 1 free draw down per month and $20 after that) and it normally takes a day or two until the money is available for your to spend.

    This can be a good thing, if your intention is to save until a specific future date, however it can be a bad thing if you plan to use the money for renovations or to pay the rates.

    I may sound like to broken record, but ask your bank, as every one has different rules, fees time frames etc.[:)]

    Hope this helps,

    Victoria
    [email protected]

    Reason can answer questions, but imagination has to ask them. — Ralph Gerard

    Profile photo of RENEE2003RENEE2003
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    @renee2003
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    So if I put money into my ip it wont affect the amount of tax I get back at tax time for the propety??

    Thanks for your help.

    Profile photo of vik_famvik_fam
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    @vik_fam
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    quote:


    So if I put money into my ip it wont affect the amount of tax I get back at tax time for the propety??

    Thanks for your help.


    Income is income, regardless of where you put it.

    Victoria
    [email protected]

    Reason can answer questions, but imagination has to ask them. — Ralph Gerard

    Profile photo of RENEE2003RENEE2003
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    @renee2003
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    Thanks for that. My accountant told me not to put it into my hoan account and put it into a seperate account but that never made sense to me when I can redraw it in any amount, at any time and with no fee from my current home loan.

    Profile photo of vik_famvik_fam
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    @vik_fam
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    Did he say why? This doesn’t really make any sense to me either

    Victoria
    [email protected]

    Reason can answer questions, but imagination has to ask them. — Ralph Gerard

    Profile photo of RENEE2003RENEE2003
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    @renee2003
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    No he didn’t he just said I can’t. Stupid me it was my first time to an accountant so I just sat there and listened and didn’t really say much.
    I don’t think he knew what he was talking about.

    Profile photo of AdministratorAdministrator
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    @piadmin
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    Renée, the only effect it will have on tax is that, by paying off principal (or having the same amount in the offset account) you will be reducing the amount of interest you pay in that financial year, eg if you pay an extra $1000 into the loan, you will save $70 interest at 7% over the year. This interest would have been tax deductable though, so if you’re in the 48.5% tax bracket, then you’ll only really save $36.05 “after tax”. So paying principal or letting money sit in an offset account is pretty much like a 3.5% investment after tax. Depending on your time frame, you may find an alternative investment that is better than this. (eg a non-deductible personal loan {I know you aren’t silly enough to have one of these! [like I have[:(] ]})
    Jim.

    Profile photo of RENEE2003RENEE2003
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    So does that mean what ever money goes into paying off my ip will be taxed at 48.5%?? What can you do to lower that tax rate, is there anything??

    ING bank have a savings account for 4.75% I think maybe that would be better??

    What do you think?

    Profile photo of vik_famvik_fam
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    @vik_fam
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    Tax is charged at your marginal tax rate. This may be 48.5% or it may be lower.

    Do you have other debt that could be paid off first? What is the interest rate on your Home Loan?

    Victoria
    [email protected]

    Reason can answer questions, but imagination has to ask them. — Ralph Gerard

    Profile photo of RENEE2003RENEE2003
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    @renee2003
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    My interest rate is 6.57% variable with CB. I want to change this over soon to a lower fixed rate.

    Don’t have any other debts. Should I just save money into a ING account?? Better interest rate.

    Profile photo of AdministratorAdministrator
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    No Renée, that’s not what I said. Your payment into your IP isn’t taxed. It just saves interest by reducing your principal. I’m just saying that the interest it saves would have been tax deductible anway, so you are only saving the bit that would be left after your tax refund, ie $36 in my example. The tax rate is just your marginal tax rate, ie the tax you would have to pay on any extra dollar of income you earn on top of your current wage. You have to have a taxable income of over $62,500 this year before you cop 48.5% tax.
    The ING direct account is actually not as good as your offset account, because you have to pay tax on the interest you receive, eg you put 1000 into ING, you’ll get $47.5 in interest over the year. The tax man will then say “I’ll have 48.5% of that in tax thanks”, (if you are in that bracket) so you’ll be left with $24.46 after tax, compared to $36 with the offset account.
    My comparison of the personal loan would work like this: Your personal loan is at say 10.5%, and if you put $1000 extra into that, then you would save $105 in interest. This isn’t tax deductible, so it’s still a saving of $105 “after tax”.
    Hope this makes sense. Sorry if I’m a bit confusing, it’s my geeky maths background.
    Regards, Jim

    Profile photo of Mortgage HunterMortgage Hunter
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    @mortgage-hunter
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    There is a very real reason your accountant gave you the advice he did.

    If you put it in redraw and draw if for any reason other than investment then you are creating a new loan which is not deductable.

    It will make things very difficult come tax time.

    If there is any chance you might spend $1 of it on a personal item like a car, holiday etc then put it in OFFSET!!!!!

    Call me and I will explain it to you.

    Cheers,

    Simon Macks
    Mortgage Hunter
    [email protected]
    0425 228 985

    Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.

    Profile photo of RENEE2003RENEE2003
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    @renee2003
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    Thanks for your help. Might do tomorrow if it hasn’t sunk in by then.

    Bye all.

    Profile photo of Prop16Prop16
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    @prop16
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    Hi Simon,

    how are you?
    You might remember my case of yesterday where you gave me some valuable advice.
    After reading Renee’s post does it mean that it would be a good idea to put my spare money (cash money) into a mortgage offset account after I bought the first IP. The loan has to be with an offset facility right?
    Thanks!

    Profile photo of Mortgage HunterMortgage Hunter
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    @mortgage-hunter
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    Number one place to keep it is in your PPOR mortgae . Offset account if that PPOR might become an IP down the track.

    If no PPOR then offset is OK.

    Cheers,

    Simon Macks
    Mortgage Hunter
    [email protected]
    0425 228 985

    Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.

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