Advice on Interest only and Offset accounts.

Having said that. It will still come down to how good your money handling habits are. In some cases, it is actually better for an individual to pay P&I than having it IO + Offset due to bad money habits. As soon as they see money in the bank, they spend it on wants not needs.

Hi Knox,

Am I right in saying that using this method I’m basically freeing up more cash to purchase more IP’s?

Correct – the bank only asks that you pay Interest – nothing needs to be paid off the Principal – so you “pocket” the extra, putting it to work in your Offset account (which helps to REDUCE the Interest owing each month).

And you keep your spare dollars “freed up” too, as you may remove the total contents of the Offset at any time, at which point the original loan and Interest/month reverts to its original settings – which leads on to your next point:-

How does maximizing my tax deductible debt benefit me?

The ATO allows you to claim any IP losses against your personal Income (wages), thus reducing your “Taxable Income”. Now, we have two common scenarios with this:-
1. If an IP is negative geared, you are losing money each month in hopes of a later equity gain. The loss after all expenses, less rental income, is applied to your personal Income for the year. This loss reduces your Taxable Income, but your employer would have been paying Tax for you as though your wage was your only income. With your Taxable Income reduced (by the negative geared loss), the ATO will write you a cheque as a Tax Refund.

2. If an IP is positive geared, you are making money each month. Your accountant adds the Income, less all expenses, to arrive at your total gain for the year from the IP – this is then added to your Taxable Income, and YOU write a cheque to the ATO for the extra. By paying Interest only, you are not spending after-Tax $$ paying down the Principal, but you ARE reducing the Interest paid, so your deductions do get less, and you make more of a Profit each year (and write a bigger cheque to the ATO). Same as if you worked an extra job – you make money from it, you pay extra Tax.

BUT, when you find another use for the $$ in Offset, like buying another IP, and you take those $$ out of the Offset, your original loan and Interest remain at their original amounts, thus you are making LESS money (paying more Interest), so you pay less Tax.

Instead of using your after-tax $$ to reduce the Principal (thus the Interest owing) on an IP, you keep the Principal at its highest, and use the Offset to lower the Interest. THEN, when opportunity knocks, you use those after-Tax $$ you have saved in your Offset to generate another Income by buying an extra IP, or you might use it as a deposit on a PPOR. You don’t have to “ask the Bank” to get some more Equity out of your house to buy another one. No need to – you are your own bank !!

So yeah – HUGE gains and flexibility by utilising Offset accounts (as per that LONG example I linked you to – read it a few times and see if it starts making sense to you),

Benny