Home Loan Tips 1

To Offset Or Not To Offset ….

Kind of reminiscent of Shakespeare’s opening phrase of the soliloquy “To be, or not to be…” in Hamlet, wherein a dejected Hamlet contemplates death and suicide. He laments the pains and unfairness of life but acknowledges the alternative might be still worse … nothing so drastic when it come to your home loan, but the question of whether to offset or not was brought sharply into focus this week by an investor with a burgeoning property portfolio.

As with most of you a prime concern is having the best or competitive rate and preferably no fees, and that’s what he got, the best rated no fee home loan to suit his situation. No offset account mind you because he didn’t want to incur the fees and he could get a pseudo offset anyway by sitting excess funds directly in his home loan account.

Which is all well and good if all you want is one investment property, now he’s looking at a second and possibly third investment property which is why the question to have an offset account or not, and in this situation it’s not just a case of interest savings, but before I get ahead of myself …what’s an offset account you may ask?

Let me explain. An offset account, interest offset account, mortgage offset account and offset home loan are all one and the same but different banks and lenders call it different things. In any event it’s a separate account which is linked to a loan and which offsets the interest charged to that loan. Hence the generic term offset account.

Perhaps the easiest way to describe how an offset account works is to show you an example. Let’s say you owed $250,000 on your home loan and you had $10,000 in your offset account. Your lender would calculate the interest on your loan for today based on the amount owing on the loan less any offset balance. In this example the interest calculated would be based on a net balance of $240,000.
Even better, let’s take another example to illustrate how an offset account works … assume you owed $250,000 on your loan and you also had $250,000 in your offset account (wouldn’t that be nice). In this example you wouldn’t be charged interest at all.

 

Is an offset a good idea?

Well, yes and no … it’s really subject to your situation. The fact is, is that if you haven’t got much money sitting in your offset account each day on average it’s not going to have much of an impact in the way of interest savings. Therefore before choosing an offset account you should consider if it is going to be worth paying any extra fees or paying a higher interest rate to get one linked to your loan. Which is where our budding investor mentioned at the start of this post found himself at the start of his property journey, but then things can change and sometimes it may still be beneficial to take a more expensive loan with an offset account especially because of the tax implications.
And if you’re going to go down that road into a tax mine field and because an offset account is a deposit product and therefore falls inside of what a licensed financial advisor does they are best to advise on the whether or not an offset account is appropriate for your situation. I have attempted to outline some of the advantages and uses of offset accounts in this post but please seek qualified financial advice.

 

Funds in an offset account versus paying funds into your loan

For starters paying funds into your loan has the same effect as if those same funds were sitting in your offset account. Using the above example if you decided to pay the $10,000 into your loan rather than leaving in your separate offset account the interest for the day would still be calculated based on $240,000. There is no difference mathematically to the interest calculation for that particular day. However the way those funds can be treated if redrawn for example is quite significant.

 

Tax deductibility of loan redraw versus funds in an offset account

There is fundamental difference between redraw and offset accounts in that funds paid into a loan and then redrawn for non-investment purposes will affect the tax deductibility of the loans interest going forward whereas funds paid into an offset account and subsequently used (for whatever purpose) do not affect the loans potential for tax deductions going forward.

If the loan is an investment loan or if the intention is to convert it to an investment loan in the future then paying funds into a loan then using redraw for personal purposes is a mistake that can’t be undone.

What seems like a slight difference is actually significant which could cost  you thousands of dollars in lost deductions over many years.

Summary

In short, subject to your situation an offset account can be a great loan feature and be quite beneficial to you. With a bit of forward thinking an investor can use an offset account to maximise their future tax deductibility benefits. It can also be said that an offset account linked to an interest only loan is perhaps the most flexible of all loan structure as it allows for any eventuality.

Needless to say, if you want to know more about how an offset account could work for you, not to mention the other tricks of the trade please contact Savvy Home Loans.

 

Watch out for the next blog where I reveal How To Get A Home Loan Without Any Genuine Savings