Mortgage offset accounts.

Hi Renee,

Let me start by saying that a financial adviser or your bank are the people to speak with for specifics, however I can certainly offer you my opinion.

Depending on the way your loan is set up, it generally makes no difference whether you put money straight into the loan, or park it in the offset. If the offset is 100%, then the interest charged is exactly the same as if it had been deposited directly into the loan.

Normally, on any account with an offset facility, you will be able to redraw your advance payments. ie, if you pay $1000/month and your minimum payment is $800/month, each month you will go into advance by $200. So after 1 year, you will have $2400 advance payments. Your bank will normally let you redraw this amount.

As a comparison, if your minimum is $800/month, and you deposit $800/month into the loan and leave $200/month in the offset, the interest charged will be exactly the same, your loan will not be in advance, but you will have $2400 in your account at the end of the year.

Basically the same. The one thing I see as being different, is that money in your offset account can be drawn at any time, ATM, EFTPOS, BPAY etc, so it is easy to p*ss it away without being aware. Money left in your loan needs to be drawn out. Most banks have a minimum (say $1000 per drawn down) and charge fees (say 1 free draw down per month and $20 after that) and it normally takes a day or two until the money is available for your to spend.

This can be a good thing, if your intention is to save until a specific future date, however it can be a bad thing if you plan to use the money for renovations or to pay the rates.

I may sound like to broken record, but ask your bank, as every one has different rules, fees time frames etc.[]

Hope this helps,

Victoria
[email protected]

Reason can answer questions, but imagination has to ask them. — Ralph Gerard

quote:

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So if I put money into my ip it wont affect the amount of tax I get back at tax time for the propety??

Thanks for your help.

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Income is income, regardless of where you put it.

Victoria
[email protected]

Reason can answer questions, but imagination has to ask them. — Ralph Gerard

Did he say why? This doesn’t really make any sense to me either

Victoria
[email protected]

Reason can answer questions, but imagination has to ask them. — Ralph Gerard

Renée, the only effect it will have on tax is that, by paying off principal (or having the same amount in the offset account) you will be reducing the amount of interest you pay in that financial year, eg if you pay an extra $1000 into the loan, you will save $70 interest at 7% over the year. This interest would have been tax deductable though, so if you’re in the 48.5% tax bracket, then you’ll only really save $36.05 “after tax”. So paying principal or letting money sit in an offset account is pretty much like a 3.5% investment after tax. Depending on your time frame, you may find an alternative investment that is better than this. (eg a non-deductible personal loan {I know you aren’t silly enough to have one of these! [like I have[] ]})
Jim.

Tax is charged at your marginal tax rate. This may be 48.5% or it may be lower.

Do you have other debt that could be paid off first? What is the interest rate on your Home Loan?

Victoria
[email protected]

Reason can answer questions, but imagination has to ask them. — Ralph Gerard

No Renée, that’s not what I said. Your payment into your IP isn’t taxed. It just saves interest by reducing your principal. I’m just saying that the interest it saves would have been tax deductible anway, so you are only saving the bit that would be left after your tax refund, ie $36 in my example. The tax rate is just your marginal tax rate, ie the tax you would have to pay on any extra dollar of income you earn on top of your current wage. You have to have a taxable income of over $62,500 this year before you cop 48.5% tax.
The ING direct account is actually not as good as your offset account, because you have to pay tax on the interest you receive, eg you put 1000 into ING, you’ll get $47.5 in interest over the year. The tax man will then say “I’ll have 48.5% of that in tax thanks”, (if you are in that bracket) so you’ll be left with $24.46 after tax, compared to $36 with the offset account.
My comparison of the personal loan would work like this: Your personal loan is at say 10.5%, and if you put $1000 extra into that, then you would save $105 in interest. This isn’t tax deductible, so it’s still a saving of $105 “after tax”.
Hope this makes sense. Sorry if I’m a bit confusing, it’s my geeky maths background.
Regards, Jim

Thanks for your help. Might do tomorrow if it hasn’t sunk in by then.

Bye all.

Number one place to keep it is in your PPOR mortgae . Offset account if that PPOR might become an IP down the track.

If no PPOR then offset is OK.

Cheers,

Simon Macks
Mortgage Hunter
[email protected]
0425 228 985

Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.