LOC vs Offset for Shares

[poyner]

Hi,

I have what will hopefully be a fairly simple question about LOCs and offsets.

We currently have two IPs and no PPOR (living in UK). Against one of the IPs we have 3 loans and an offset. The loans are:
$145k - fixed IO fully drawn
$128k - variable IO fully drawn @ currently 8.86%
$30k - LOC $0 drawn @ currently 9.36%

We also have an offset account against the variable IO loan with approximately $20k in it.

So my question is, if I'm thinking of diversifying and buy some MFs/Shares am I better off using the LOC or the offset funds?

The way I see it, it won't make any difference in terms of tax deductibility of the loans. Is this right? But the obvious benefit of using the offset funds is the 0.5% lower 'interest rate' it will attract, however I believe this may create difficulties when we return to Australia and want to buy a new PPOR. So maybe we're better off using the LOC and keeping the offset funds for a PPOR deposit?

Thanks for any help.

 

[marg4000]

Not sure what you mean by saying "But the obvious benefit of using the offset funds is the 0.5% lower 'interest rate' it will attract," as by using offset account money there won't be any interest at all.

An offset account is simply a savings account attached to a loan so that instead of receiving interest you have the offset balance deducted from the amount owing on the loan, therefore paying less interest.

If you use the offset money to buy shares then there is no deductions because you are simply using your own cash and not borrowing money.

So if you intend to buy a PPOR I suggest you borrow money from the LOC to buy the shares, and the interest will be tax deductible.
Marg

 

[poyner]

Not sure what you mean by saying "But the obvious benefit of using the offset funds is the 0.5% lower 'interest rate' it will attract," as by using offset account money there won't be any interest at all.

As the offset account is offsetting against a loan on an IP at 8.86% it is effectively earning 8.86%.... Tax free no less.

An offset account is simply a savings account attached to a loan so that instead of receiving interest you have the offset balance deducted from the amount owing on the loan, therefore paying less interest.

Yep. Understand that.

If you use the offset money to buy shares then there is no deductions because you are simply using your own cash and not borrowing money.

There's the extra interest on the loan that the offset accounting is offsetting.

So if you intend to buy a PPOR I suggest you borrow money from the LOC to buy the shares, and the interest will be tax deductible.
Marg

Yeah I think that's where I've come to as well.