Alternative to Offset Accounts???

Trying to understand...

Just re-read this thread (and assuming no PPOR on non/low income earning spouse).

If you take say 50k or so that is in an IP loan offset account and invest it elsewhere, eg, where you get higher yields - this doesn't really seem to be of benefit (based on my calculations) as the higher your yield eg, 9% or 10%, overall your tax deduction (for simplicity - the interest on IP loan minus income from high yield investment) gets lower. Even if you leverage that 50k to 100k, your overall tax deduction (/tax position) is lower than if you just left the 50k in the offset account (unless the yield is very, very high, eg. >20%).

So, the only time where the 50k in the offset may be better off somewhere else is if the 50k is put into an investment that has the added feature of at least moderate to high capital growth prospects (ie. there is zero capital growth on 50k in an offset account). This sort of investment would typically be of moderate to high risk/volatility and have good liquidity.

Hence, if the cash in the offset account may need to be used within 12 months, then this sort of investment I initially suggested would not be appropriate it seems.

If you have more cash in the offset account than you think you will need in the short-term eg (1-3 years), then I would consider this strategy of using some of the cash in an investment loan offset account to invest in say commercial property trusts or share funds, with the use of leverage - this could be positively or negatively geared, depending on your overall serviceability position.

Again this strategy may not result in a huge benefit as opposed to just keeping the 50k cash in the offset account, unless, the investment chosen has got good capital growth potential versus just being a high yielding investment.

Having said that, if I had enough cash in my offset account (and little equity), I'd be more inclined to buy another IP at 97% LVR,, assuming one can manage the holding costs if it is negatively geared. And given I have little expertise in CPT's or shares.

I am getting more confused the more I think about this.

Anyone have any other thoughts???

GSJ

LPTs will usually return some capital growth in line with inflation, so you usually come out ahead. Lets say 10% yield and 3% capital growth.. 13%

Current interest rate is about 7.5% depending on the lender, but you're still well ahead. In many cases the funds could return alot more than the 3%

I was chatting with another forum member offline (alexlee) about this very issue and he had this to add:

Remember the main thing with the offset is that ALL YOU GET is the mortgage rate. It doesn’t compound and it doesn’t increase your asset base (growth on your IP is the same no matter what the LVR is). Whereas if you buy shares, it’s COMPOUND growth AND you increase your asset base. It’s similar to the idea of should you have 1 $200k IP with a $100k loan, or 2 x $200k IP with a $300k loan. Sure you pay more interest, but your asset base is bigger too. Putting money into an offset account just decreases your interest but doesn’t increase your asset base. Buying shares, in my opinion, diversifies, lets you take advantage of special situations in the sharemarket, and most importantly increases your future growth.

Click to expand...

I thought you might like it as well.

A mistake I made when comparing the various options was that I only ever ran the scenario for 1 year. Run the same scenario for 5 or 10 years and see what you end up with.

Also, here was is a little comparison you might find helpful as well http://www.somersoft.com/forums/showthread.php?p=194824&highlight=offset#post194824

Yes David, leveraged and compounding capital growth in assets will make the investment loan offset a poor comparison, as long as there is no immediate need for the cash. A PPOR offset is still OK though.

GSJ

Based on these input figures:

Home loan interest 7.00%
Margin loan interest 8%
Share growth 7.50%
LVR on shares 50%
Tax rate 46.50%

It's break even. Anything over 7.5% you'll be ahead, although the monthly cashflow can be a bit of a killer. Given that the long term average is above this, if you can manage the cashflow and are happy with the risks go for it.

With the above input data an income based fund needs 11% just to break even...

I guess you'd want to gear higher if you were doing this.

I am yet to work these figures out to 10 years. I think the compounding effect will be more noticeable then.