i read through the old information about offset accounts on this website, two questions that i didnt see answered were
1) what the reason behind increased payments towards your loan when using an offset account
2) and what does the bank use your money for? if your not earning interest do they place it in shares etc or earn interest of other people?[cap]all help would be great :p
2)in my case the offset account on ppor loan is my day to day account, that my income goes into and my expenditure comes out of. It doesn’t “earn” interest, just saves it off the loan balance. So, I guess the bank just does with it whatever they usually do with an ordinary savings account…. Make more money out of it by means I am not sure I want to know…
~jo~
If you had spare cash and invested it in a normal account the interest would be taxed and then inflation would also erode your investment. If you stick it in an offset account you have an advantage of being able to draw on the money if needed , where as if you reduce the loan you might find it a hassle to get a redraw.
Offset accounts are mainly designed around normal home loans rather than investment properties. Primary residence home mortgages are not tax deductible. An offset account by reducing the interest on the loan means that each repayment pays off a little bit more of the principal. This can make a huge difference when compounded over 25 years to your loan.
Also the offset account balance cannot be more than the loan balance.thanks for the help
Guys,
Offsets also get used on IPs. Most IPs are interest only to minimise your outgoing cash flow. But people setup offsets to park their spare cash to minimise the interest on their IPs. The benefit of this is that you can draw that cash straight back out when you need it for deposit on the next IP without having to go through some complex LOC/redraw process. Its yours to spend when you need it, but is effectively off the loan for interest calculation purposes.
Cheers,
Michael.Is this the best way to buy another Ip. Buy using an offset account (on another IP) for a new IP deposit.?
Was thinking it could be a good idea if you want to put down a really large deposit on a new Ip with the idea of moving in when the new IP loan has reduced. Any thoughts?
Summer,
An offset account is simply your transaction/savings account whose balance is applied against your loan account for the purposes of calculating interest payable.
If you have a LOC/redraw facility on your loan and have the available funds to use as a deposit, then, this would be a clean and legitimate way of placing a deposit on another IP.
Bear in mind, if you make the IP a PPOR, you will not be entitled to claim the interest on the funds you advanced from your LOC, from that date.
Summer
If you are sure that you wish to make the IP your PPOR eventually, it doesnt really make a difference which way you go, since you are not concerned with the tax deductability of the loan later on.
However, an offset a/c would give you the flexibility to change your mind later, keep the current property as an IP, redraw the cash as a deposit on a new PPOR, and retain tax deductability on the full current balance of your current IP loan.
I am in a similar situation to you, and have opted for an offset.
g1
Thanks for help. I thought that was the case. If it is just an IP only then a redraw is enough as it is tax deductible. But moving in making it a PROR is better coming from an offsett account so you have the most money in the PROR as it is not tax detuctiable. Thats rights isn’t it?
A redraw would only be tax deductible if the money was used for investment/tax purposes. An offset is good because it is a totally separate account to the loan.
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
Click below to email meTerryw | 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
offset account also has a higher interest rate compared to LOC.
Kev
There’s no Such thing as No Can’t Do!!!!!
I would have thought that an offset account is only really useful to reduce owner occupied debt (non-deductible). If you were negative gearing I would imagine that you would attempt to pay interest only for maximum benefit and apply an offset to only the non-deductible debt.
Regards,
Kurt
Hi Summer,
If your intentions are to pay down non deductible debt (PPR Loan) at a faster rate, then I would suggest a 100% offset linked to the PPR debt may be a good idea,
However, you may find it more beneficial to link the offset to existing non-deductible debt, if applicable.
Cheers.Hi Kev,
A 100% offset account doesn’t return interest, the funds/balance in the offset account are linked to your nominated loan, and the offset rate is comparable to the rate of the loan. Cheers.Regards
Steven
Mortgage BrokerPhone: 0402483216
[email protected]
http://www.mobilemortgagemarket.com.auPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
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