ING at 4% or IP offset at 5.38%?

[4GH1RH]

Currently only have one property (that used to be my PPOR and has an offset account attached) but is now and IP and positively geared.

I have ~$40K in cash savings - would it be better off in offsetting the IP loan and reducing that interest bill or would it be better off in something like and ING SavMax at 4%?

Either way I'm going to pay tax on the interest as the IP produces income and will produce more income if the interest is reduced. Will also pay tax on interest in ING account.

Intent to purchase PPOR in 2015 and then will use the cash to offset the PPOR loan, but no non-deductible loans at present.

Thx

 

[tobe]

Having money in the offset will mean the property overall will be less cashflow positive. It will have a benificial effect on your tax.

The home loan has an interest rate higher than 4% so its the better place to put the cash.

 

[Peter_Tersteeg]

Earn 4% in a savings account and pay tax on it (so you probably only get about 3%) or save 5.38% in an offset account with no tax to be paid.

You're going to be at least 2% better off in the offset account in this scenario, it's a no brainer. You're probably thinking there would be a bunch of negative gearing implications using the offset account but there really isn't.

 

[Ace in the Hole]

Having money in the offset will mean the property overall will be less cashflow positive. It will have a benificial effect on your tax.

Please help me understand this.
OP puts cash in offset.
Interest payable reduces.
Therefore, claimable expenses are less.
Leading to less deductions and more profit.
Which generally means more cashflow, not less?

Am I missing something?

 

[j_p]

I don't think so Ace in The Hole, I would say you are spot on. It will increase the positive cash flow of the property and therefore increase tax liability.

Still best off putting it into the offset account however.

You either get taxed (at your tax rate) on the 4% pa interest in a savings account

or

Save 5.38% on the amount in the offset and pay tax on the increased income from the IP (1.38% better before tax)

 

[HiEquity]

AITH is right - this isn't a PPOR offset - it's an IP.

If the ING saving account can be opened in a lower income spouse's name, this could change the equation but otherwise you either pay your marginal tax rate on either the savings or the reduced deductions for the IP. Same same - just the interest rate is different.

 

[Peter_Tersteeg]

PPOR or IP offset account makes a slight difference due to the tax deductions available on the loan, but even after considering this, you're still far better off putting the money into the offset account rather than a savings account.

Putting the cash into a low income earner savings account makes a difference again, but still unlikely to be enough.

 

[4GH1RH]

Thanks everyone, as I suspected the offset is the better option, and fortunately where I have had the funds sitting. I keep the ING account for putting money aside for my holidays, so a much lesser amount!

 

[albanga]

Yeah must say this ones a no brainer. If no non deductible debt then seems logical to offset the highest interest possible.
The only consideration is if you can get a higher return somewhere else? Shares? Matthew Wade most runs tonight in T20?

 

[unloadmymind]

Thanks everyone, as I suspected the offset is the better option, and fortunately where I have had the funds sitting. I keep the ING account for putting money aside for my holidays, so a much lesser amount!

why put your holiday money in the lower after-tax cashflow option when you can put it in offset?

 

[unloadmymind]

It amazes me when people are willing to lose lots more money just to save tax.
Especially when their NG gamble has no guarantee they will get huge CG at the end.
Too much of a gamble IMO.

 

[4GH1RH]

I keep my holiday savings separate to the IP for simplicity sake, I don't want funds getting mixed up

Unloadmymind I'm not sure I understand what you're trying to point out in this context?

 

[J_aco]

OP: I had a very similar question and started a thread last night too. Gathering from all the responses I suppose offset against an IP is still better than a savings acct.

albanga:

putting money on Watson NOT reaching 50 would be just as wise...

on the other hand - money on Clarke getting a 100 in ADL would have been a good punt (his record in ADL is brilliant and he would be SOOO determined to get it for hughes... I didn't know what the odds were though... just saying )

 

[Redom]

Earn 4% in a savings account and pay tax on it (so you probably only get about 3%) or save 5.38% in an offset account with no tax to be paid.

You're going to be at least 2% better off in the offset account in this scenario, it's a no brainer. You're probably thinking there would be a bunch of negative gearing implications using the offset account but there really isn't.

The tax effect of putting the money in an IP offset and putting money in a savings account is effectively the same - while you wont be 'paying tax' on your funds in the offset, you'll claim the equivalent amount LESS in deductions - so it has the same tax effect.

E.g. If you put $100,000 in a savings account, earn 4%, and are on a 38.5% marginal tax rate - you'll earn $4,000 (less 38.5%). Whereas if you put $100,000 in your IP offset where you pay 5.38% interest, you will be paying $5380 (less 38.5%) in interest.

It therefore makes sense to put it in your Offset. You are gaining 1.38% on your money from doing so.

Cheers,
Redom

 

[unloadmymind]

I keep my holiday savings separate to the IP for simplicity sake, I don't want funds getting mixed up

Unloadmymind I'm not sure I understand what you're trying to point out in this context?

sorry some of my comment relates to those who focus too much on tax deductions instead of the net cash flows.

can you not set up a separate offset account for your holiday savings? ask your lender. or just keep a spreadsheet of your finances and update it weekly so you know you exact financial position every week/month.

 

[unloadmymind]

The tax effect of putting the money in an IP offset and putting money in a savings account is effectively the same - while you wont be 'paying tax' on your funds in the offset, you'll claim the equivalent amount LESS in deductions - so it has the same tax effect.

E.g. If you put $100,000 in a savings account, earn 4%, and are on a 38.5% marginal tax rate - you'll earn $4,000 (less 38.5%). Whereas if you put $100,000 in your IP offset where you pay 5.38% interest, you will be paying $5380 (less 38.5%) in interest.

It therefore makes sense to put it in your Offset. You are gaining 1.38% on your money from doing so.

Cheers,
Redom

I think you meant to say: Whereas if you put $100,000 in your IP offset where you pay 5.38% interest, you will save/avoid $5380 (less 38.5%) in interest.

 

[4GH1RH]

Thanks everyone, worked it through and I get it now, sorry if I was a bit slow on the uptake. There is tax either way, but better to be paying tax on a $5380 gain than on a $4000 gain as ultimately you end up with more net.

Sorry if this was a newbie question!

 

[Redom]

I think you meant to say: Whereas if you put $100,000 in your IP offset where you pay 5.38% interest, you will save/avoid $5380 (less 38.5%) in interest.

Well said.

Exactly!

 

[HiEquity]

Still, if you are on a 49% marginal tax rate and your partner isn't working, it would be better to put the cash in a savings account in their name.

 

[4GH1RH]

Still, if you are on a 49% marginal tax rate and your partner isn't working, it would be better to put the cash in a savings account in their name.

I wish on both accounts. Don't earn enough to be paying that much tax and don't have a partner.