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  • Profile photo of Matt_ArnoldMatt_Arnold
    Participant
    @matt_arnold
    Join Date: 2006
    Post Count: 142

    Hello All

    Although I always understood how an offset account worked, it wasn’t until I started playing with a few numbers with the below calculator that I realised the true power of an offset account…

    http://info.westpac.com.au/homeloans/calculatortools/offset-calculator/

    Eg. A $300,000 loan over 30 years at 5.98% paid fortnightly with an avetage of $10,000 in the offset account for the life of the loan will reduce the total interest payable by $45,575 !

    If you get a few minutes, why not have a play yourself ?

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

    The power of compounding.

    Imagine if you could save an extra 0.1% off the loan and structure things so you can get an extra $5k pa in tax deductions and use the offset account.

    I see so many people who are costing themselves a fortune because of poor structuring.

    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 tigermigertigermiger
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    @tigermiger
    Join Date: 2010
    Post Count: 44

    Brilliant link – thanks for sharing!

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,065

    Yep, offsets are  a thing of beauty (wow – how nerdy of me).

    For those disciplined with money, it can be handy using the offset as a transaction and savings account. You have all your income going into the account – including salaries and IP rent. Every dollar helps – even if parked in the account for a short period.  

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of ChrisA1ChrisA1
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    @chrisa1
    Join Date: 2011
    Post Count: 172

    Yes great link, thanks.

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

    ChrisA1

    Persistence is 'to keep on keeping on, no matter how hard the going may be'

    Profile photo of jatejate
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    @jate
    Join Date: 2013
    Post Count: 26
    Terryw wrote:

    I see so many people who are costing themselves a fortune because of poor structuring.

    Hi Terrw,

    Are you able to advise what is the best way to structure accounts for people where you have a basic portfolio such as the follows and looking to be able to most effectively scale up and grow the number of investment properties whilst still making sure we are maximizing all tax benefits, lowest costs and having the flexibillty.

    • 1 x PPOR
    • 2 x Investment Property

    I'd be interested to hear what combinations of Home PPOR Loan vs Investment Property Loan, Offset Accounts for each or Line of Credit account structure people should be creating. Moreover would be curious to understand how best to operate these. For Example like: place all salary in account 'X', all rental income in account 'Y', all renovation/bills/deposits for new IP from account 'Z'

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,065
    jate wrote:
    Terryw wrote:

    I see so many people who are costing themselves a fortune because of poor structuring.

    Hi Terrw,

    Are you able to advise what is the best way to structure accounts for people where you have a basic portfolio such as the follows and looking to be able to most effectively scale up and grow the number of investment properties whilst still making sure we are maximizing all tax benefits, lowest costs and having the flexibillty.

    • 1 x PPOR
    • 2 x Investment Property

    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

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of Tony FlemingTony Fleming
    Participant
    @the-dark-knight
    Join Date: 2008
    Post Count: 396

    Offset could be my partner <3 i do the same as Jamie all rent/salary goes in and just use a credit card and repay before the interest kicks in :)

    Tony Fleming | Triumphant Property Group
    http://www.triumphantpropertygroup.com.au
    Email Me | Phone Me

    NSW Buyer's Agent specialising in Western Sydney-Blue Mountains-Orange-Albury

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

    I see so many people who are costing themselves a fortune because of poor structuring.

    Hi Terrw,

    Are you able to advise what is the best way to structure accounts for people where you have a basic portfolio such as the follows and looking to be able to most effectively scale up and grow the number of investment properties whilst still making sure we are maximizing all tax benefits, lowest costs and having the flexibillty.

    • 1 x PPOR
    • 2 x Investment Property

    I'd be interested to hear what combinations of Home PPOR Loan vs Investment Property Loan, Offset Accounts for each or Line of Credit account structure people should be creating. Moreover would be curious to understand how best to operate these. For Example like: place all salary in account 'X', all rental income in account 'Y', all renovation/bills/deposits for new IP from account 'Z'

    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

    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 Colin RiceColin Rice
    Participant
    @fms
    Join Date: 2011
    Post Count: 338
    The Dark Knight wrote:
    Offset could be my partner <3 i do the same as Jamie all rent/salary goes in and just use a credit card and repay before the interest kicks in :)

    Clean, simple and effective and fingers and toes crossed the banks dont meddle with offsets down the track. 

     

    Colin Rice | CDR Finance
    http://cdrfinance.com.au/
    Email Me | Phone Me

    Perth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]

    Profile photo of FreckleFreckle
    Blocked
    @freckle
    Join Date: 2012
    Post Count: 1,681
    Matt_Arnold wrote:
    Eg. A $300,000 loan over 30 years at 5.98% paid fortnightly with an avetage of $10,000 in the offset account for the life of the loan will reduce the total interest payable by $45,575 !

    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.

    Profile photo of StumpCamStumpCam
    Member
    @stumpcam
    Join Date: 2006
    Post Count: 76

    I agree Freckle, except perhaps for the fact that the offset account should be applied to private debt if it exists. There won't be any tax effect in this case. I doubt that you'd keep the private debt for thirty years if you could help it, but that's not really the issue. 

      My pet hate is when banks and advisers love to tell us how much interest we'll save if we pay just a little bit extra each month or pay 10k up front (which does the same as the 10k in the offset acct) without taking inflation into account as you've mentioned. The 10k or early repayments are in today's dollars, but they are saving dollars up to 30 years into the future. Let's try 2.5% average inflation for 30 years: that makes a dollar then worth about 47c now. 4% inflation => 31c now etc.

     It would be nice to see the true savings always quoted in today's dollars, not just the nominal saving in future dollars.

    That's my 2c.

    Cheers, S/C

    Profile photo of Alistair PerryAlistair Perry
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    @aperry
    Join Date: 2004
    Post Count: 891
    Freckle wrote:
    Matt_Arnold wrote:
    Eg. A $300,000 loan over 30 years at 5.98% paid fortnightly with an avetage of $10,000 in the offset account for the life of the loan will reduce the total interest payable by $45,575 !

    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. 

    Profile photo of Rick staRick sta
    Participant
    @rick-sta
    Join Date: 2011
    Post Count: 119

    And if you look closely you will discover that these inflation figures of 2.5-4% are BS.

    Profile photo of FreckleFreckle
    Blocked
    @freckle
    Join Date: 2012
    Post Count: 1,681
    APerry wrote:
    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.

    Profile photo of zenzen
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    @zen007
    Join Date: 2016
    Post Count: 46

    @jamie, thanks for your article on IO loan for PPOR intention for my place to be an investment property in future. Good to know these tactics.

    @terry, thanks for your examples, great to know the insights before delving in at the deep end.

    @alistair, good article, learning heaps from you guys.

    Cheers

    zen

    Profile photo of Mikey66Mikey66
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    @mikey66
    Join Date: 2016
    Post Count: 12

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

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