Do I need Offset for Second IP Loan?

[rsoul82]

Hi,

I've been dealing with a mortgage broker to try to get a pre-approval on a loan for a second investment property.

The broker has come back with two options but I have a few questions that I would like to seek advice on before I make a decision...

Current Mortgage on first IP is split into two loans:
- ~$350k - 6.89% fixed (1 year remaining before it becomes variable)
- ~$20k - 5.93% variable (will become ~$60k due to drawing equity for 2nd IP)

I am paying P&I on these loans but also have an Offset account that reduces interest on the variable amount. My intention is to make 2nd IP loan IO.

Broker has asked for the 2nd IP loan, if I would like:
a) ~$320k - 5.64% discounted variable (but no Offset) - $600 setup fee
b) ~$320k - 5.93% variable with Offset - no additional setup fees or annual costs as covered by existing loan

Questions:
- is there any benefit for an Offset on the 2nd loan?
- is it ok to go ahead with no Offset on the 2nd loan to get a better rate, and just put any extra 'savings' into the Offset of the 1st IP?
- do you recommend always going for Offset on all loans? or is one Offset account enough?
- would it be a better idea to get the Offset on the 2nd IP loan and start using that to store any 'extra' money as it will reduce interest on a much larger loan (~$320k) compared to the 1st loan variable portion (~$60k).
- any other advice or things to consider?

 

[Mick C]

Technically you only need one offset ( as you won't have enough cash to offset both mortgage).

Which one you choose too have the offset will depend on which one will most likely become your PPOR; even if it's only for 6 month...IF your not sure then it's safer to make them both have the offset.

1/ benefit of having 2 offset is flexibility -
2./ Yes it's fine to place the funds into the 1st IP's offset... PRESUMING they are BOTH IP. ( ie no PPOR)
3./ I only recommend offset all your loans if you have no idea what you will be doing with your properties. OR your going with the same lender and under their package they allow multiple offset for free! ie NAB.
4/ Offsetting a 300k VS 60k - if they have the same purpose, i would alwasy choose to offset the large loan...as your offset can easily build above the 60k buffer in a few years time...


P.s General advice only..as choosing when and how too offset a loan, falls under loan structuring and this def require some personal advice and consideration- esp if fixed rates are involved.

Regards
Michael

 

[Rolf Latham]

will you have any borrowed funds in any offset ?

ta
rolf

 

[Terry_w]

Assuming same owners it shouldn't matter how many offsets you have. You will still save the same amount of tax.

 

[Rolf Latham]

Assuming same owners it shouldn't matter how many offsets you have. You will still save the same amount of tax.

xcept if one offset is used to park borrowed funds and the other for tax paid funds

ta
rolf

 

[Terry_w]

xcept if one offset is used to park borrowed funds and the other for tax paid funds

ta
rolf

That is a good point. Separate issue is will be money borrowed and invested into an offset account be deductible?

Please see advice from your neighbour before doing this.

 

[rsoul82]

Thanks for the responses...

will you have any borrowed funds in any offset ?

ta
rolf

No borrowed funds in any offset.
Current offset is credited with my salary minus any monthly spendings

Assuming same owners it shouldn't matter how many offsets you have. You will still save the same amount of tax.

Yes. Same owner.
What do you mean by same amount of tax?
If I get the 5.93% with offset, my monthly interest only payments are higher then a 5.64% with no offset. Doesn't that mean my taxable income will be different as I'm paying more interest over the year?

xcept if one offset is used to park borrowed funds and the other for tax paid funds

ta
rolf

That is a good point. Separate issue is will be money borrowed and invested into an offset account be deductible?

Please see advice from your neighbour before doing this.

Sorry, you guys confused me a bit here...not sure what you mean by borrowed funds? Do you mean borrowed from other people such as family?

 

[Terry_w]

Ok, scrap what I said above.

Say you have a loan at 6.00% with an offset and another with 5.94% with an offset. You would be better to place your cash in the offset attached to the loan with a higher rate as you would be saving more interest.

If both rates on both loans were the same then you would not need a second offset unless you had more cash in the offset then the total of the loan.

Since you have an offset on the first loan I would be inclined to go for the lower rate loan for the second as there is no real point in having a second loan with another offset if you already have an offset - but this would depend on the other conditions of the loan too.

 

[Jamie M]

Generally speaking - one offset is enough.

Having said that, make sure that the second loan is suitable to your needs and isn't simply a cheap loan. There's other things to consider then just rate.

Cheers

Jamie

 

[Aaron_C]

I think more than one offset is overkill unless it is free or there is a good reason for it.