The True Power of an Offset Account

Brilliant link – thanks for sharing!

Yes great link, thanks.

It's good to see when it all starts coming together (offsets, structuring)

There's no one size fits all but a good general structure is interest only for all loans with an offset linked to the PPOR. I'd have all rents and other income paid into the offset and use a credit card with a points system for everyday expenses. I'd then clear the credit card once a month before interest kicks in.

This article I wrote for Australian Property Investor magazine explains the concept in a little more detail.

Cheers

Jamie

It all depends on many things such as if properties owned jointly or solely etc

generally
PPOR
IO loan with 100% offset
All income and rent to go into the offset

Equity in the PPOR should be accessed via a LOC. Best not to use a standard loan as deductibility can be destroyed – and I am licenced to give tax advice so I can advise on this = in writing too

IP loan should be IO.

As IP grows equity should be accessed and ‘paid’ back to the LOC for a few reasons. 1 is to keep things separate a bit.

LOC can also be used to pay all expenses for the IP and this will free up cash to pay into the PPOR offset.

In some situations I may recommend paying off the PPOR. Depends on the circumstances – eg. large sum of cash in offset but no equity. Best not to use the cash to offset but to repay loan and borrow it.

Also use private spousal loans in some instances to maintain 104% deductibility when there is not enough equity.

I should add all loans are stand alone with no crossing of securities.

Existing properties should also be stand alone. If they are crossed you should uncross asap

Jeez I hate these BS examples. The true power of Offset accounts are not in the piddley amounts of small change you might save over a time period but the ability to keep capital unencumbered so it can be deployed quickly with sensible amounts of leverage to generate a return.

The above example is nominal not real because it fails to include the lost tax deductability which in effect reduces the end result considerably. Scale for inflation and the savings wouldn’t buy a coffee once a week.

People also need to realise that banks offer products usually in conjunction with other products. Mortgages that allow offset accounts can incurr higher rates, fees and other charges which can further erode the nominal offset rates.

freckle, offset accounts don't effect loan balances, only interest charges. In most cases offsetting a loan has little or no consequence on tax deductibility apart from if it is being used to offset interest in a tax deductible loan. In this scenario, in most cases, the money can be taken out of the offset fro any purpose without effecting the tax deductibility of that loan. It is very different in this regard to redraw or drawing on an LOC. They can, but often do not, come with higher rates. 

Yep agree.

People also need to keep in mind that Offset a/c’s have constantly changing amounts depending on how they’re used. To manage them effectively to capitalise on interest offsets users need to fully understand the conditions in which a dollar counts towards an interest charge offset. It may take 30 days before a dollar qualifies and that may fall between certain time frames so the first part period may not count. IT can be very complicated for anyone to actually analyse these sorts of accounts but the use of simple calculators is often illusory.

Great post guys! I am trying to soak up all the information i can these posts are gold!