Hi all, I've been doing some reading on offset loans and wondering whether it would be a good idea for my parents to consider refinancing the loan they have on an investment property. Five years ago they borrowed $270,000 to fund 100% of their investment property. They got a standard variable loan with the CBA for which they are paying both principle and interest. i think they have paid off roughly $20,00 off the principle. The current property value is about $360,000 going by what similar houses have sold for. They also have about $90,000 in savings that they usually put into term deposits to gain interest. Would they be better off by changing their home loan to an offset account?
I'm thinking that if they had their money in an offset account they would only pay the interest on $180,000 ($270K – $90K) and drastically reduce their monthly repayments. Is this correct?
A mate of mine has a home loan that is 70% fixed and 30% as an offset home loan. Would it be possible for my parents to change their loan to something similar?
I think they could potentially be savings heaps off their loan but they're just too frightened of anything that is more complex than a simple standard variable loan. I can just see myself struggling to try and explain the benefits of having a different kind of loan, Lol. Also, would there be any fees or penalties for changing loans? Any advice/info would be very greatly appreciated.
Do your parents have any non-deductible debt first? If so they would be better off paying that down first.
Certainly a IO with a 100% offset account would benefit them. They would be saving interest like you say. With the term deposit they would be getting a lower rate interest and they will have to pay tax on this interest too.
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
Terry is right pay down the non deductible debt first.
If however they do not have any personal debt and they dont need the Term Deposit interest to live on then why wouldn't they place the Term Deposit funds into an offset account.
The effective rate of interest will be a lot higher than they are currently receiving and they still have immediate access to their money.
Unfortunately CBA do not offer a fully transactional offset account whatever they tell you so would need to consider going elsewhere.
Depending on the current rate of interest the change could benefit in more than one way.
Richard Taylor | Australia's leading private lender
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Richard Taylor | Australia's leading private lender
They don't have any non-deductible debt except a very minor credit card balance. Probably $500.
If CBA doesn't have a fully transactional offset account is it possible to just have all their day to day funds be in like a streamline account and then they can deposit whatever excess they have into the offset account?
skuz wrote:They don't have any non-deductible debt except a very minor credit card balance. Probably $500.If CBA doesn't have a fully transactional offset account is it possible to just have all their day to day funds be in like a streamline account and then they can deposit whatever excess they have into the offset account?
Thats not a good idea. Depositing into an account = repayment of loan. Withdrawing = new borrowings. So there are huge tax consequences. eg. say they put all their money into the account and then withdrew it all again to use for living expenses. Within a very short time they could beat the stage where none of the interest is deductible, but they will have the same loan amount.
Best to use an offset.
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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