Hi all. I don't know what to do.
Have loans with a basic interest rate around 1% lower (Bankwest) but these will revert to normal variable rates within the next few months. I have spoken to the bank and due to the size of the loan and me paying on time, they would keep the rates low for another 2 years if I want. These loans come with no offset account though.
Now I don't know what to do. I have excess cash just sitting around and I'm unsure whether to pump it directly into the loan (they allow this and allow re-draws but at $80 a pop, I'm not interested), or leave as is and set up an offset account and leave the money in there. Might be paying a higher rate though.
I'm more interested in how this affects me tax wise as I've read it's better to leave the loans alone and pay the interest for tax purposes. Is there any difference if I pump a lump sum directly into the loan which lowers my repayments vs pumping it into an offset account which also lowers my repayments?
Any help is appreciated as I'm not sure whether money in an offset account means for tax purposes, the interest is still calculated on the entire loan. Not sure I can see the difference but there must be some reason it isn't as good an idea to directly pay off the loan.
Thanks
donkey33 wrote:Hi all. I don't know what to do.Have loans with a basic interest rate around 1% lower (Bankwest) but these will revert to normal variable rates within the next few months. I have spoken to the bank and due to the size of the loan and me paying on time, they would keep the rates low for another 2 years if I want. These loans come with no offset account though.
Now I don't know what to do. I have excess cash just sitting around and I'm unsure whether to pump it directly into the loan (they allow this and allow re-draws but at $80 a pop, I'm not interested),
If you redraw the money later and want it to be tax deductible the purpose of the redraw has to be for investment purposes.
donkey33 wrote:or leave as is and set up an offset account and leave the money in there. Might be paying a higher rate though.
I'm more interested in how this affects me tax wise as I've read it's better to leave the loans alone and pay the interest for tax purposes.
If you have an offset account (make sure the balance comes off loan when the loan interest is calculated)
So you reduce your loan interest by say as an example $20,000 you save $23 a week in interest (6% p/a) $1200 per year.
If you can have your wage put into the offset account then this is reducing the interest also. It may be for a short time but if you have the financial discipline to put all your day to day expenses on an interest free 50 day credit card and pay it off in 50 days you can have more money reducing your interest on your loan on a daily basis.
You will reduce your loss from your property but lets look at this more closely.
Do you know the tax scales?
$34,001 to $80,000 tax is 30%
$80,001 to $180,000 tax is 40%
http://www.ato.gov.au/individuals/content.asp?doc=/content/12333.htm
So if you earn as an example $79,000 a year as a wage then you have to lose $100 from your investment to get back $30
So you just lost $70
or if on the higher bracket you just lost $60
Lets say you saved $100 from the offset setup – You have to pay $30 in tax but keep $70
if on the higher bracket you just gained $60
This gain reduces your loan as it will have a compound effect over the term of the loan if repayments are not reduced.donkey33 wrote:Is there any difference if I pump a lump sum directly into the loan which lowers my repayments vs pumping it into an offset account which also lowers my repayments?The difference is flexibility in what you can do with the offset money at a later stage without affecting tax deductible status
(you cannot have more in the offset than the loan amount also)
A redraw would have to be used for investment purposes to gain back the tax deductible status..donkey33 wrote:Any help is appreciated as I'm not sure whether money in an offset account means for tax purposes, the interest is still calculated on the entire loan.Depends on type of offset account (make sure the balance comes off loan when the loan interest is calculated)
(some offset accounts pay interest on the offset account balance and then reduce the loan by this lower interest rate rather than reducing the loan balance for higher rate loan interest calculation !BEWARE! of this subtle difference !)donkey33 wrote:Not sure I can see the difference but there must be some reason it isn't as good an idea to directly pay off the loan.
ThanksHopefully my above explanation has shed some light on the differences.
Thanks duckster. That was a good read.
The way I see it is there is really no difference. I'm very discipline with my cash. The money I pump directly into the loan won't be taken out again unless it is used as a deposit elsewhere which as you said, would still be tax deductible.
So, guess I should just go with the more basic loan and get the lower rate. It would be nice to have my income go directly into the account because as of now, as soon as it goes into my account, I split it. A separate amount for bills, separate amount for savings. The bills amount sits in an account and is direct debited so I don't have to worry about them from month to month. I guess that money would be better in an offset but it works and is only a small amount.
If I'm right, it should be this (a fictional example and say I have 30k spare).
A 300k loan at 8% = 24k in interest. With an offset, I pay inerest on 270k meaning 21.6k in interest.
Taking the same loan (300k) at 7% = 21k in interest and the 30k would still be available to use or pump into the loan lowering the interest again.
Is that right? Seems I'm a lot better off taking the lower rate and putting it directly into the loan.
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