Robbing Peter to pay Paul?

Hi Dave,

My mortgage is also with the CBA. As Jamie states there is the MISA account but the CBA also allows me to park as much extra money in my fully variable mortgage as i like and it is free to redraw funds via net bank as often as you like as long as its a minimum of $500 at a time. I believe this has the same effect as an offset account which is how it was explained to me when I was setting it up. That' is how I have been doing it anyway.

Hope it helps somehow,

Josh

LOL, thats an interesting way of putting it.

Do you ever intend to own or already own your own property to live in aka PPOR?

If you are going to buy your own place one day in the future then it is advisable to go interest only with an offset account and save the difference that you would normally pay towards the principal amount. 

Two major reasons for this is;

1. You preserve the principal loan amount for max tax deductions.

2. The funds being amassed in the offset can be used as a deposit on a PPOR when you are ready to purchase.

Without knowing your overall financial position, it would likely be better for you to have an offset connected to you IP mortgage with interest only repayments and your salaries plus rent going into the offset account plus any other spare dollar you have lying around, unless you can get a better return than the current mortgage rate, taking into account you will be paying tax on any earnings.

If you decide to sell your IP to help buy your future PPOR then no harm done BUT if you hold onto your IP (recommended)  then you will have preserved the principal loan amount and also saved the difference plus any other funds added from salary etc whilst offsetting the IP.

If you have paid the IP loan down then draw the loan up for a PPOR purchase as you suggested then it wont be tax deductible as the "purpose of funds" is for non tax deductible debt being your PPOR.

So its not dribble but a smart and efficient strategy on how to best manage your finances whilst also potentially minimising the tax you are paying  .

Sit down with the RIGHT broker and get them to go over this with you as you are doing yourself a disservice if you don't.

Cheers.

Hi David

Why wait?  I am assuming your loan is on variable as opposed to fixed (an offset won't help you if you are on fixed).

The MISA account (essentially an offset account)

You have $19k in your offset.  The standard variable interest rate with the Commonwealth is 5.9%, and for the sake of the exercise, let's pretend interest is calculated annually rather than daily because it is easier to demonstrate the calculation in a forum post.  Putting $19k in the offset account would save you $19,000 x 0.059 = $1121.  (In reality this figure would be higher since interest is calculated daily and compounds. The true figure is $1154.63)

Comparing this to the Smart Access Account:

The interest rate on this loan is 0.01% per annum.  So you would earn $19,000 x 0.0001 = $1.90. From this figure, tax would be deducted because interest earned in a regular savings account is considered to be income.  Let's say you are in the 37% tax bracket.  Your tax would be $1.90 x 0.37 = $.70.  So you would actually end up with only $1.20 in your pocket because $1.90 – $0.70 = $1.20.  Let's not talk about what it would cost you if somehow this modest $1.90 in interest managed to just tip you into the next income tax bracket.  You would actually lose money rather than make money.

So your choices are:

Open a MISA and put the $19,000 in there and you will save $1154.63 in a year.

or

Leave it in the Smart Access account, and you will save $1.20.

There is quite a big difference between $1154.63 and $1.20.  The difference is $1153.43.  That can by you a brand new oven if the oven in your IP breaks, and there will be a couple of hundred dollars left over.  Or it can buy you a return flight to an international destination.  Free holiday.  Nice.

When you end up with a big pile of money in an offset account (or MISA in this case), you could:

– Pull the money out and use it as a deposit on another property

or

– Go on holidays with it

or

– Pay some bills

or

– Leave it there with the eventual goal of the balance of the offset being equal to the amount you owe on the property, so that you end up paying zero interest (which is sort of the same as having paid off the loan)

or

etc etc.

The difference is that you don't have to ask anyone's permission to withdraw it, and you can do whatever you like with the money.  You can buy $19,000 worth of shoes if that's what you want.

With a redraw, it is new borrowings as the boys have already pointed out.  You have to "apply" for getting your own money back you see, and there will be a fee for doing so.  And the answer to your request might be no.  Just think if you had lost your job and thus in the eyes of the bank, you had no way of repaying the redraw.  They could opt not to give you the money.

Hope this helps clear a few things up.  I think you would be crazy not to have an offset account (or MISA) and store as much of your spare cash in it as you possibly can.  It is essentially a place that you can earn tax-free interest, at a much higher rate than is on offer in a savings account, and it doesn't increase your taxable income (so doesn't put you at risk of creeping into the next tax bracket).