I’ve just purchased an IP and have an interest only loan with offset account and redraw.
I am renting and do not have a PPOR loan.
I get my wage deposited into the offset, and have bills and other expenses come out of that same account.
I’m just wondering if there is any difference, tax wise or other, of me paying extra money to the loan account rather than keeping it in the offset ?
My preference would be to pay it back to the loan account, as I don’t trust myself not to dip into it occasionally if its sitting in the offset. Especially after a few years.
Cheers
Firstly welcome to the forum and i hope you enjoy your time with us.
If you dont intend to purchase a PPOR any time soon then i guess a P & I loan is ok however you have to consider that if you ever use the redraw you have contaminated the interest.
Redraw = new loan and therefore boils down to the purchase of the funds.
If this is not for investment the interest is not deductible.
When you use an offset account the funds are separate and the loan interest protected.
If you dont trust yourself you would always set up a separate savings account and use this for your day to day expenses and then save money in the offset account to reduce the interest charged.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Interest wise it should be the same
Tax wise it can be completely different as any deposit into a loan = a repayment and any withdrawal = new borrowings.
Imagine you had paid $50,000 (all your cash) into the loan and then decided you wanted to buy a $50,000 ivory back scratcher. You would need to re borrow this from the loan and the interest would not have been deductible. Now consider if you had used an offset.
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 guys, that answers my question.
Hi Bucko,
Just to add a little that may help clarify, although your 2 responses so far are exactly correct.
What I always tell clients is this, it does not matter what the money is borrowed against but what it was last 'USED FOR' that designates if it is tax deductable or not. Hence if you paid down the loan and then redrew the money it would only be tax deductible if the redraw was for a deductible investment purchase.
Hence whomever put you on the track of an offset account for an investment property was 100% correct.Keep paying the money into the offset, if you pay it into the mortgage and the mortgage has a redraw facility it is just as simple to get at anyway.
Between the 3 of us hopefully this has cleared up your question.
RegardsColin.
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