My apologies if this has been asked before, but I'm hoping someone can tell me very plain and simple what is better. At the moment we have a loan with the Commonwealth, at 6.8% variable rate but just switched to economiser loan at 6.29%. We make additional repayments straight into the homeloan, and I wondered whether that's any different to actually putting this money into an offset account?
Their offset account has a minimum withdrawal of $500 so wouldn't be quite suitable for every day use & purchases.
We're in the process of applying for a State Custodians loan, a line of credit at 5.82%, which will be split into 1 paying off the current homeloan + an additional loan for a possible investment property.
Since we have personal & business income, this needs to be kept separate and I was told I could do this by putting 1 income straight into the loan, and 1 straight into the offset account. The State Custodians loan does not have a minimum withdrawal or fees. This loan may however not be approved which is why I'm researching options through our current setup with the Commonwealth.
Unfortunately their economiser loan at 6.29% does not qualify for use for an offset account, so we would need to switch back to the standard variable rate of 6.8%. Would that still be worth it?
Thanks a lot to all replies,
ElleFirst off with the CBA loan, why did you have a standard variable rate product without a package? Unless the loan amount is really small, surely the package discount would offset the yearly fee? The standard variable rate is basically a recommended retail rate that hardly anyone pays.
Moving on to the offset facility. In terms of the interest you are paying, there is no difference if the extra funds were paid on the loan itself or into the offset account. However some advantages of an offset account is it firstly gives you greater control over your funds (as they say cash is king), and secondly if you have a property that is going to be an IP in the future, you maximise future tax deductions more so than if you paid into the loan and redrew later on.
However you will need to be disciplined and not be liable to spend the excess funds sitting in the offset account otherwise it's no use having it.
Hi Elle
Without knowing too much of your information its difficult to give accurate advice.
With CBA, if you pay the annual package fee you’ll get a reduced rate.
The offset account is a bit of a pain but it does work.
For purchases, you can use the credit card provided under the package and then pay this off each month or so with funds from your offset. That way, your also earning points (we usually earn enough to go on a holiday each year care of the CBA visa card).
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Elle
There is a huge difference between and offset and redraw. It may work out the same in terms of interest, but there are whole lot of tax issues.
I suggest never pay extra off a loan but always use an offset.
And NEVER use a LOC for a loan but only to access equity. If you use a LOC it will be the same as constantly using redraw. You could end up with a large loan with none of the interest being deductible.
This is what I suggest
1. IO loan on main residence with a 100% offset account
2. Separate split on the available equity as a LOC. This should only ever be used to pay investment expenses and deposits etc. Never pay this off, but just pay the interest each month
3. A new IO loan for the new investment property. No offset needed and never pay any extra off this loan.Once loan 1 is paid off then you can transfer the offset account to loan 3 the investment property.
If you are hopeless with money then maybe you should have PI with loan 1.
Also you should not be running a business in your own name. This is risky. If you will continue to do so then there is probably no reason to use a separate account but just use the offset account so that you save some more interest.
And combine this with using the credit card for FF points. But becareful with buying personal items and business items and then paying off the investment portion with the credit card.
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 Tom,
We don't qualify for their wealth package unfortunately as we have only $125000 left on the current mortgage. Their wealth package starts at $150000, and they told me it wouldn't be worth it anyway for loans under $150000. If we were to get additional funds through them for an IP than it's definately something to look at.
The tax deduction would be something though for the IP and if that goes through we'll have the offset account for that. Still the problem of the 2 incomes though, where one most likely will need to go straight into the loan, and the other into the offset account.
Thanks again, EllePLC wrote:First off with the CBA loan, why did you have a standard variable rate product without a package? Unless the loan amount is really small, surely the package discount would offset the yearly fee? The standard variable rate is basically a recommended retail rate that hardly anyone pays.Moving on to the offset facility. In terms of the interest you are paying, there is no difference if the extra funds were paid on the loan itself or into the offset account. However some advantages of an offset account is it firstly gives you greater control over your funds (as they say cash is king), and secondly if you have a property that is going to be an IP in the future, you maximise future tax deductions more so than if you paid into the loan and redrew later on.
However you will need to be disciplined and not be liable to spend the excess funds sitting in the offset account otherwise it's no use having it.
Thanks Jamie!
I'm going to get my husband to have a look at this info to see what he thinks – looks like we need to do some reshuffling! As the current mortgage left is very small we don't qualify for CBA's wealth package, but if we were to go for an IP we definately would.
Cheers, ElleJamie M wrote:Hi Elle Without knowing too much of your information its difficult to give accurate advice. With CBA, if you pay the annual package fee you'll get a reduced rate. The offset account is a bit of a pain but it does work. For purchases, you can use the credit card provided under the package and then pay this off each month or so with funds from your offset. That way, your also earning points (we usually earn enough to go on a holiday each year care of the CBA visa card). Cheers JamieThanks so much Terry,
There's a lot of info there we need to look at. We were recommended by our account to keep the business as sole trader in my husbands name, possibly pay me a wage if that suits tax. How could we not have it in our own name?
We wanted to have the business income go into the offset as this will be our main income over summer and autumn. Without that going into it, there's no point to have an offset at all I suppose. Are you a mortgage advisor?
I'm going to get hubby to take a look when he comes back from the mines to see what he thinks.
Cheers, ElleTerryw wrote:ElleThere is a huge difference between and offset and redraw. It may work out the same in terms of interest, but there are whole lot of tax issues.
I suggest never pay extra off a loan but always use an offset.
And NEVER use a LOC for a loan but only to access equity. If you use a LOC it will be the same as constantly using redraw. You could end up with a large loan with none of the interest being deductible.
This is what I suggest
1. IO loan on main residence with a 100% offset account
2. Separate split on the available equity as a LOC. This should only ever be used to pay investment expenses and deposits etc. Never pay this off, but just pay the interest each month
3. A new IO loan for the new investment property. No offset needed and never pay any extra off this loan.Once loan 1 is paid off then you can transfer the offset account to loan 3 the investment property.
If you are hopeless with money then maybe you should have PI with loan 1.
Also you should not be running a business in your own name. This is risky. If you will continue to do so then there is probably no reason to use a separate account but just use the offset account so that you save some more interest.
And combine this with using the credit card for FF points. But becareful with buying personal items and business items and then paying off the investment portion with the credit card.
I forgot to ask;
Would it be worth switching from the 6.29% economiser loan to the 6.8% standard variable loan just to get the offset facility?Elle
You would generally use a Pty Ltd company to run a business as this gives limited liability and opportunities to split income. What sort of business is it? Asset protection is important.
How much is left on your non deductible portion to the loan? It may not matter too much, you might just be able to use redraw and just pay everything into the loan and pay it off asap and then set up properly for the investment.
Yes, i am a finance broker.
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
And is it worth switching to State Custodians, or better to stay put with CBA?
Thanks Terryw,
We run an online nursery business from home.
We have about $125000 left on the current loan, with property being worth around $400000.
At the moment we have everything going into a goal saver account at 5% interest, and make some extra repayments into the loan aswell, every week. We could put everything into the loan, but there is a minimum redraw of $500 and costs $50 per redraw, so it’s probably not an option to put it all into the loan for the purpose of having funds available.
Cheers, ElleTerryw wrote:ElleYou would generally use a Pty Ltd company to run a business as this gives limited liability and opportunities to split income. What sort of business is it? Asset protection is important.
How much is left on your non deductible portion to the loan? It may not matter too much, you might just be able to use redraw and just pay everything into the loan and pay it off asap and then set up properly for the investment.
Yes, i am a finance broker.
That is still a fair bit of money left and will probably take you a few years to pay it off so it may be worth looking into changing loans. The redraw fees look too high to work around.
Business in your own name can be risky – what if you have a contractual dispute for example and it goes to court. But since you are selling online the risks would be generally low.
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
The way State Custodians are going to set it up is a two way split, 1 for the current mortgage with 100% offset account, and 1 Line of Credit for the investment property. If we were to setup a new loan when the investment property comes along, we would incur all the application fees etc. again, which is why they recommended setting this up straight away as an LOC so we can redraw that when we are ready to buy the IP. We may be able to change that into a standard interest only loan later? It would work similarly though this way doesn’t it, we first pay off the current homeloan with the offset account, and once that’s paid off it’ll switch to the investment property?
danandel wrote:Thanks so much Terry,
There's a lot of info there we need to look at. We were recommended by our account to keep the business as sole trader in my husbands name, possibly pay me a wage if that suits tax. How could we not have it in our own name?
We wanted to have the business income go into the offset as this will be our main income over summer and autumn. Without that going into it, there's no point to have an offset at all I suppose. Are you a mortgage advisor?
I'm going to get hubby to take a look when he comes back from the mines to see what he thinks.
Cheers, ElleTerryw wrote:ElleThere is a huge difference between and offset and redraw. It may work out the same in terms of interest, but there are whole lot of tax issues.
I suggest never pay extra off a loan but always use an offset.
And NEVER use a LOC for a loan but only to access equity. If you use a LOC it will be the same as constantly using redraw. You could end up with a large loan with none of the interest being deductible.
This is what I suggest
1. IO loan on main residence with a 100% offset account
2. Separate split on the available equity as a LOC. This should only ever be used to pay investment expenses and deposits etc. Never pay this off, but just pay the interest each month
3. A new IO loan for the new investment property. No offset needed and never pay any extra off this loan.Once loan 1 is paid off then you can transfer the offset account to loan 3 the investment property.
If you are hopeless with money then maybe you should have PI with loan 1.
Also you should not be running a business in your own name. This is risky. If you will continue to do so then there is probably no reason to use a separate account but just use the offset account so that you save some more interest.
And combine this with using the credit card for FF points. But becareful with buying personal items and business items and then paying off the investment portion with the credit card.
So are they proposing you buy the investment property solely with the LOC and that it wouldn't be used as security?
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
So are they proposing you buy the investment property solely with the LOC and that it wouldn't be used as security?
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
which is why they recommended setting this up straight away as an LOC so we can redraw that when we are ready to buy the IP
And for that statement solely is the reason why you wouldnt use State Custodians to set up your new investment loan.
As Terry has mentioned some great Tax advise from a Banker !!!! and poeple wonder why they get into so much trouble come Tax time when they listen to such statements.
Dont get het up on the interest rate or the fact that you might incur a dollar here or a dollar there by way of application cost as you will be lose much more than this if the structure is set up incorrectly.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Yes, I suppose that is exactly what they’re proposing, as we haven’t bought or even found an investment property yet.
Terryw wrote:So are they proposing you buy the investment property solely with the LOC and that it wouldn't be used as security?Thanks Richard & Terry, that’s great advice.
So, this may be a really silly question, but what would really be the difference between the setup you suggested Terry, and the way they are planning to set it up? As it is still a split loan, with the offset facility being on the main residence property, and IO on the investment/LOC portion? And the interest rates they’re offering are much better than the CBA.One thing we are taking into consideration, is that we feel we should take advantage of the amount they are willing to give us right now. Hubby has been working in the mines, which is why they’re willing to give us the additional funds at the moment, but we are planning on going back to working in our own business in summer and autumn. When we do, it’ll be very hard to get any kind of separate investment loan approved.
Cheers, Elle
Qlds007 wrote:which is why they recommended setting this up straight away as an LOC so we can redraw that when we are ready to buy the IPAnd for that statement solely is the reason why you wouldnt use State Custodians to set up your new investment loan.As Terry has mentioned some great Tax advise from a Banker !!!! and poeple wonder why they get into so much trouble come Tax time when they listen to such statements.
Dont get het up on the interest rate or the fact that you might incur a dollar here or a dollar there by way of application cost as you will be lose much more than this if the structure is set up incorrectly.
Cheers
Yours in Finance
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