Hello All,
Firstly some details:
I have just purchased an IP for $400k and fully own my PPOR.
Rent on the IP is around 20K
I earn approx 100k before tax PA.
I also have 50k sitting in a savings account.My question is….
Do I leave the 50k where it is and continue to pay the tax on the interest I earn or do I place the 50k into the IP offset account I have created?Can someone please shed some light on this?
Many Thanks
MV
MV
Unless you are earning 7%+ in the savings account it would probably work out better for you to put money in the offset as you will be earning whatever the loan interest rate is.
Also, If you have a spouse on a lower income then it may work out better to lend it to them and they earn interest in a savings account.
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
Thanks Terry,
Didn't think it was that simple!
Mortgage Rate 6.4% (CBA)
Savings Rate 5.0% (CBA Netsaver)I was thinkng along the lines of people always saying ….only pay IO is the way to go with IP's. But isn't putting the 50k effectively reducing the P+I and also reducing the amount I can claim back on interest repayments made come finanical year ? I understand I wold loose $2500 in interest earned on the $50k which effectively is closer to half after tax but I would have thought the answer to be more complicated. Perhaps I was just over analying the whole thing?
Thanks again,
Michael.
It is pretty straight forward.
If you put the 50 Grand in an offset account, you will earn more money, than if you leave it in the savings account, as you will save 100% of the interest in the offset account, and only save the post tax ammount of interest from a savings account AND the interest rate in the savings account is worse than the offset.
The only time it would ever make sense to leave the money in a savings account, is if the interest rate in the savings account was higher than the interest rate of the loan AND your income is below the tax free threshold so that you are not being taxed on the savings interest …… It will Never happen!
( If it did work , you would be getting paid money from the banks, the more loans you got out, as long as they stayed below the tax free threshold )
or
use this formula if you are above the tax free threshold.
Your savings account interest rate would have to be higher than the mortgage rate by a factor of your top tax bracket just to break even :
savings rate = 6.4 % + ( 0.3 * 6.4 ) = 8.32 % just to break even, that is if your top tax bracket is 30% ( 0.3 ) in the formula
Ie – it will never happenYou should always keep your money in which ever offset account has the higher interest rate charged against it, and if you hold a mortgage in the place you live, it’s better to put the offset against that house if you are living in it, as you can claim more interest charged against tax for the IP.
If you did it the other way around ( money in offsett against IP ) , you would loose the ability to claim the tax deduction on the account without the 50 K ( own house )
Interest only with an offset account Vs P + I makes basically no difference, I have a $4100 interest bill per month for my IP interest only, when I change to P + I, It changes to $4300, and means it will be paid off in 30 years.
With the P + I you are slowly forced to pay it off….. with Interest only you have more cash available…. normally a good thing, and allows you to invest more, but we are normally talking only a minute amount more, like 200, maybe 100 a month,,,, certainly not make or break for most pple.
Would you rather earn $100 in interest or save $100 in interests on the home loan?
Both would result in the same savings – assuming the same entity is involved.
The $100 interest would be taxable. The $100 in interest saved would mean you have $100 less in deductions which means your taxable income will increase by $100.
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
Thanks Gents,
Thanks for clearing that up for me.
Appreciate your time and feedback.
Regards,
Michael.
Putting money in offset account would save $3200 per year (.064 x $50,000 = $3200)
where $ in saving account would make only $2500 per year (.05 x $50,000 = $2500) but then you would loose a further $750 in tax (assuming 30% tax rate) (.30 x 2500 =$750) only leaving you with $1750.offset account is a much better idea!!
Terryw wrote:Would you rather earn $100 in interest or save $100 in interests on the home loan?Both would result in the same savings – assuming the same entity is involved.
The $100 interest would be taxable. The $100 in interest saved would mean you have $100 less in deductions which means your taxable income will increase by $100.
This is not quite correct.
Lets assume the interest rate is the same ( it never will be ) for arguments sake.
50 Grand at 6.4 % for one year gives you $3200 + if it is compounded daily and paid regularly
With the money In a savings account, you end up with say $2240 post tax, AND you have to pay $3200 more on your loan interest than the other scenario.
2240 – 3200 = You spend $960….yes you can claim the $3200 against the IP taxable earnings, but the facts are, savings interest rates are lower than mortgage, so you will always end up with less money if you left it in the savings account,than if it were in the higher interest rate account.
HI dachopper
I am not sure I completely understand you post. Assuming interest rate on offset and on savings are exactly the same, I still cannot see how it would differ if interest is calculated daily and added monthly to the savings account/off the loan interest.
I was failing to take into account taxation on savings, but this would generally only be paid at the end of the financial year if you give the bank your TFN.
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
If you assume the loan is $50,000 – and interest rate 6.4%
Then he will save $3200 in a savings account, then get charged tax, then have to pay $3200 to the Interest only account – Ie – he will loose whatever money he pay’s in tax ( by his top marginal tax rate amount ) on the savings account profit.
If he puts it in an offset account, then he saves $3200 worth of interest per year.
It doesn’t matter when the tax get’s paid, it’s still a loss of that amount. The other factor is that savings rates are below mortgage, so that loss will actually be a lot higher % wise in reality, because the same rates are never involved in reality.
I still don't see how it differs. Remember this scenario is based on an offset account attached to an investment property.
Say the IP has a taxable loss of $5,200.
If he has $50k in the offset then this will save $3,200 pa in interest. So the tax situation for this property will become $2,000 loss
This effectively means his income overall has increased by $3,200. This in turn means tax will increase by his marginal rate x $3,200.
If he had put the $3,200 in the savings account at the same interest rate his loss on the IP would be the same, but his overal income would be increased by $3,200. So he will end up paying $3,200 x marginal tax rate in extra tax.
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
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