Hi all,
I know the real basics of Offset account but would love to read and understand more on it. Could anyone elaborate more on it please?
What is its real purpose?
what are the advantages?
How does this work?many thanks.
Hi Trance
Wont see much written by lenders on the effect of an offset account as many do not offer such a product and those that do are too keen on paying you such a high rate of interest.
To answer your questions:
What is its real purpose? When you place your everyday savings, rental income and other forms of income in an everyday savings account you will receive a nominal rate of interest depending on the daily balance of which the interest you receive needs to be shown as interest income on your Annual Tax return.
An offset account is an on call savings account where the lender does not physically pay you out any interest (thus nothing to declare on your tax return) however the interest they would have paid is deducted from the interest you are being charged on your associated mortgage loan. The rate of interest offered on these types of account varies from lender to lender however ideally you would try and look for an account where 100% of the interest at the same rate as the mortgage is paid to you the borrower.
I.E Assume you have a mortgage loan of $300,000 being charged at 10% per annum and have $30,000 sat in a 100% mortgage offset account at the same rate. Interest for the year on the loan would be $300K x 10% = $30,000 however this would be reduced by the interest received on the offset account. $30K x 10% = $3,000. Net interest charged = $27,000.
If you had the $30K merely sat in a day to day account earning say 5% you would only receive $1500 in the year and this $1500 would then be taxed at your highest marginal rate. Even if this is only 30 cents in the dollar the amount you receive would be reduced to around $1050. Big difference to $30,000 in the offset A/c
what are the advantages?
Hopefully the above explanation helps clarify the use. There are many advantages when it comes to loan planning and Tax structures especially if the home is to be ever used as an investment property. For clients who have paid off their home they can attach the offset account to an IP loan and receive the same benefit.
The fact that the 2 accounts are separate is the biggest drawcard and the fact that the offer flexibility as time goes on.
Drop me a line of you need further clarification.
Richard Taylor | Australia's leading private lender
ok then my next quest is …
what is the difference between an OFFSET account and an LINE OF CREDIT account?
thanks once again.
Think of a line of credit as a great big credit card i.e THE BANK'S money – you have a limit, secured against your property, and you need to pay x% of the outstanding debt each month.
An offset account is YOUR money in a savings account.
Say you have a mortgage of $100,000 and a balance of $10,000 in your offset account. You only pay interest on $90000 of your mortgage balance.
Thanks for the quick reply mate!
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:)” title=”>:)” class=”bbcode_smiley” />I have a redraw facility on my mortgage. Can I use this in a similar way to an offset account? What are the differences?
Hello Marl
As imugli said, an offset account is a savings account with your money in it which is used to decrease the amount of interest you pay for the loan that this account is coupled to. You can deposit and withdraw from this account at will for both personal and investment purposes and it has no effect on the loan itself.
A redraw facility is the ability to re borrow any extra repayments you've made off your loan but you can think of each withdraw as a new little loan which has to pass the "purpose test". If you use a re draw for personal expenses, then even if the original loan is ( or becomes) for investment purposes, then this amount is no longer tax deductible.
Cheers
ElkaThanks for the quick reply!
This is all very new and confusing to me – it was enough just to organise a loan for my unit in the first place! But thanks, I'm slowly getting my head around it all.
marl
The first one is the hardest Marl
Ask questions, research research research, and use brokers and accountants for all you can get from them. You may have to pay for their services, but they'll save you more than they'll cost you in the long run.
Good luck!
elkam wrote:A redraw facility is the ability to re borrow any extra repayments you've made off your loan but you can think of each withdraw as a new little loan which has to pass the "purpose test". If you use a re draw for personal expenses, then even if the original loan is ( or becomes) for investment purposes, then this amount is no longer tax deductible.
I understand that the amount we redraw have to pass the "purpose test", if it is not for investment purposes, the withdraw is not tax deductible, however, how about the increase interest payment due to the withdraw , is it still tax deductible?
I believe the interest needs to be have been incurred in order to make an income to make it deductible. i.e invested.
I also bleieve that the capital part of the increased payment would not be deductible, as capital is not considered an expense for tax purposes.
Hello
elkam wrote:
A redraw facility is the ability to re borrow any extra repayments you've made off your loan but you can think of each withdraw as a new little loan which has to pass the "purpose test". If you use a re draw for personal expenses, then even if the original loan is ( or becomes) for investment purposes, then the interest on this amount is no longer tax deductible.The sentence should have read as above.
A loan is never tax deductible only the interest on the loan.
Sorry if I confused anyone.Cheers
Elkahttp://www.mysalary.co.uk/finance/offset-savings-explained-account_5 here is a link of the page on offset account you can find all the detail about it here
:)” title=”>:)” class=”bbcode_smiley” />
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