Forums / Property Investing / Creative Investing / offset vs term deposit???

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  • Profile photo of on the ladderon the ladder
    Participant
    @on-the-ladder
    Join Date: 2010
    Post Count: 12

    hi all
    a quick question…
    i have two investment properties (owe $168,000 on one and $198,000 against the other) and have $50,000 in the offset account against one of them. I am now wondering… is it better to put that extra money in a term deposit for 9-12mths and earn some money to put towards other expenses (ie rates)? i also earn around $82,000 per annum with extra bits of around $5,000 to $10,000 grand throughout the year.
    just wondering if anyone has any thoughts on this
    cheers

    Profile photo of illuminatiilluminati
    Member
    @illuminati
    Join Date: 2006
    Post Count: 81

    have to check what % you get in a term deposit and the money you would make in that time vs the money you save by offsetting the loan.

    I did this these the other day as part of a presentation and for the figures i had it was much more beneficial to offset. and that was with the current figures.

    if interest rates rise over the next few months then offsetting will be even more of a good deal.

    but run your own numbers with the figures you have, because your situation and numbers will most likely be different to mine.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,110

    Yeah, with the deposit you have to pay tax on the interest received too – plus have your money tied up. I think the offset would be better – unless you had a spouse with no income maybe.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of on the ladderon the ladder
    Participant
    @on-the-ladder
    Join Date: 2010
    Post Count: 12

    thanks everyone
    nope. no spouse…. it is just lil' old me with two mortgages ie. crazy!!! although i am pretty lucky cause the rents combined cover the repayments and a bit of the property manager fees but i am just trying to work out if there is a better way of getting that  50 thousand to work for me. at a term deposit of 6.24% for 9mths, i would earn $2,343.75 which would pay for one year of one house rates…tempting. i know i have to pay tax on what i make in TD interest as well, but as the houses are investment (i am paying off principal and interest) any tax benefits in using the money elsewhere?

    thanks again!

    cheers

    Profile photo of James2118James2118
    Member
    @james2118
    Join Date: 2010
    Post Count: 27

    As was said above just do your own little checks. I know it might seem nice to have that money in your hand like that. But given what I assume your interest rate would be, obviously just guessing, but would think it would be around 6.5% (that is what mine is around) you would save yourself around $2400 after 9 months in tax, the only difference is that instead of getting this money in your hand, it is more of an intrinsic saving.

    At the end of the day, just look at the interest rates, your mortgage vs the term deposit rates, chances are the mortgage interest rate is higher, and as it looks to be increasing, you will be better off with it in the offset account. This does not even take into account paying tax on the interest earned. There could be benefits somewhere, but you would still be better off with the offset account 95% of the time.

    Profile photo of on the ladderon the ladder
    Participant
    @on-the-ladder
    Join Date: 2010
    Post Count: 12

    thanks everyone for your input.
    <br /:)” title=”>:)” class=”bbcode_smiley” />

    Profile photo of kaiseriqbalkaiseriqbal
    Member
    @kaiseriqbal
    Join Date: 2009
    Post Count: 11

    isn't tax irrelevant when comparing the two.

    If he takes money out of his offset account which is linked to an investment property, the interest expense will be higher and his tax benefit (tax shield) will be lower. If that 50K was put into a TD, then he would have to pay tax on the interest.

    So the important thing here is the rates between the two. If the offset account rate is higher, put the money in there

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,110
    kaiseriqbal wrote:
    isn't tax irrelevant when comparing the two.

    If he takes money out of his offset account which is linked to an investment property, the interest expense will be higher and his tax benefit (tax shield) will be lower. If that 50K was put into a TD, then he would have to pay tax on the interest.

    So the important thing here is the rates between the two. If the offset account rate is higher, put the money in there

    I think your right

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of kauskaus
    Member
    @kaus
    Join Date: 2004
    Post Count: 14

    hi
    I think you may be little better with term deposit- reason from this year you can have 1000$ interest tax free . so keep  upto that amount in term deposit and over that amount in offset account.

    cheers
    sati

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 11,992

    No thats is not case at all.

    If you are paying 7% on your mortgage and you are in the 30% marginal Tax rate (you will be slightly over this on a couple of K) the funds in the offset account are effectively earning 10% as the offset is Tax free. 

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
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    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
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    I seem to recall now that the govt introduced some tax rebates or similar to encourage people to deposit money a few years ago now.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 11,992

    Terry they indeed.

    Have you seen the latest figures on the take up …… let us just say they werent knocked over in the rush.

    Another great Govt incentive.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of susansusan
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    @susan12
    Join Date: 2016
    Post Count: 1

    Does anyone have a spreadsheet to help with the calculation to compare offset to TD?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,110

    Its simple really

    Lets say you have a $100,000 investment loan at 4% pa and $20,000. Depositing the $20,000 in the offset account will save you $1,600 in interest per year. This means you have $1,600 in extra income and will pay tax on this.

    Now if you put $20,000 in a term deposit at 4% you would have $1,600 per year in extra income and would pay tax on this.

    Therefore you would only consider a term deposit over an offset account if:
    a) the rate on the TD is greater than the rate on the loan, or
    b) there is a spouse on a lower income who could invest in the term deposit and pay a lower rate.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of daniel vicdaniel vic
    Participant
    @daniel-vic
    Join Date: 2013
    Post Count: 120

    I would think the offset would be better maybe you an set up another account that doesn’t get charged monthly or annual fees put your extra funds in there and pay ur bills from there when u want ?

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    It’s generally very unlikely that you will have a term deposit at a higher interest rate than the interest rate of your home loan – so best to stick with parking the funds in your offset account.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
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    Investment Focused Finance Strategist - servicing Australia-wide

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