offset account question

[whippee]

Hello, We are settling on our new ppor on wednesday and the home we are living in now will become our IP. If was am to set up an offset account, would it be linked to my IP loan(interest only), or my PPOR loan(PandI)? And why?
I was reading about offset accounts and became quite interested in getting one, due to the fact that we will "put aside" extra money each week for back up for the IP, when something unforseen happens, repairs ect. I spoke to the banker about this and he said they are good accounts, but you would want to start off with 25K or so in this account. I left there thinking who the hell has 25K to throw into an account right away? I would think that "you would have to start somewhere", right?
Any advice/ideas are welcome
thanks again
Andy

 

[Rob Williams]

Your total interest bill (PPOR and IP) will be the same regardless of which loan the offset account is attached to.
You will gain a better tax advantage by having an offset account against the PPOR loan which has the effect of maximising the decuctable portion of that total interest bill each month.
Every dollar in the offset account will save you paying interest on a dollar of the loan facility for each day that dollar is in the offset. Not sure why anyone would say you needed $25k.
Make sure you get a 100% offset account, too!
Grab a copy of the current issue of Your Investment Property magazine. It has a good article in it about maximising cash flow. Offset accounts are covered in there, as well as some other good tips.

 

[marg4000]

Why would the banker say that you would "want to start at $25K"?

Make sure that interest is 100% offset for every dollar in the account. Then start with whatever you have. We have started offset accounts with a few hundred dollars.
Marg

 

[neK]

An offset account can only be linked to one loan account. So one offset per loan. Link the offset to your PPOR.

If it does not cost you any extra dollars, then there is no harm in having an offset for your IP as well.

Here's how they work:
Your pay goes into the offset account.

The offset account looks, feels, acts in the exact same way a normal day to day transaction account does (well at least Westpac's one does).

Whatever amount is in the offset account reduces the interest charged on your loan.

For example, if you have a $500k loan, but have $100k in your offset, the bank will only calculate the interest on $400k.
So the more money in the offset, the less interest you pay.

For this reason, it is best set against the PPOR. Your IP is tax deductible, so you would be a fool to reduce the interest charged on your IP. (That said, if all you have are IP's then offset the one with the highest interest).

Now spend everything on your credit card where possible (but not to the point you spend more than you earn cos that would be stupid). At the end of each month or cycle, clear off the credit card with the money in the offset. This way you maximise the amount in your offset to reduce your interest charged.


Offset Accounts are NOT the same as redraw facility.

From a cashflow perspective and how it affects the interest being charged on the loan, they are identical (well to you the customer anyway).

From the ATO's perspective they are very different.

Using the example earlier with the $100k sitting in the offset and a $500k loan, the bank charges you interest on $400k only.

If you paid the $100k directly into the $500k loan, you would also be charged interest on $400k only.

Heres where the difference is:
Offset Account
If at any point, you decide to convert your PPOR to an IP, having an offset will allow you to withdraw that $100k (and use it for any purpose - eg buying a car, going on holiday - ie personal use) it does not affect the tax deductibility of your loan - ie the $500k is tax deductible.

REDRAW FACILITY
However had you paid the money directly into the loan and redraw it back out for personal use, only $400k would be tax deductible. The reason being is that you actually PAID DOWN $100k on your loan.

For this reason I personally believe it is 100% better to use an offset account over a redraw facility any day. (The exception to this rule is if the redraw facility offers a substantially lower rate, but these days i find the rates pretty much the same rate).

Now if you have ZERO intentions to convert your PPOR to an IP, then redraw or offset account make no difference

NOTE: My assumptions are that the offset account is a 100% offset account. I bank with Westpac and mine is a 100% offset.

 

[whippee]

Grab a copy of the current issue of Your Investment Property magazine.


Certainly will!


Thanks for the replies. Ill do a bit more reading then will look at contacting the bank and speak to him again about this. BTW I bank with ANZ and I think he did say that they do have 100% offset accounts.

thanks
andy

 

[Rolf Latham]

Now if you have ZERO intentions to convert your PPOR to an IP, then redraw or offset account make no difference

All great advice...............this bit here though I tend to apply "the law of the path". Our intentions are often one thing, but our actual path leads us somewhere else.

There are very few times where I would not steer a client down the IO offset path. One of those few is where they have demonstrated poor money skills.

ta
rolf

 

[neK]

There are very few times where I would not steer a client down the IO offset path. One of those few is where they have demonstrated poor money skills.

ta
rolf

Agreed, even i "accidentally" take more money I should out of my offset account.

The mentality here is "the money in the account, the more I can take" apply the same logic to having $100 vs $1000 in a bank account and see what % of the amount you end up withdrawing.

That said, the best way to combat is to actually have multiple accounts. Your pay goes into the offset. From the offset you transfer an "allowance" to another account to cover you until the next pay. This "allowance" is to cover for your day to day expenses in which you use cash. An alternative to this is to withdraw a set amount from the offset, and budget for that.

While isnt the most efficient use of the funds, (say you allocate $500 per fortnight $500 @ 6.06% = $30.30 pa) which is quite minuscule compared to what you could do if you had full easy access to your funds.

this bit here though I tend to apply "the law of the path". Our intentions are often one thing, but our actual path leads us somewhere else.

Too true. Majority of people ive met all start with the mentality "This is my PPOR and when i want a bigger house im going to sell it". Ive lost count of how many people have retracted those words and asked "how do i convert this to an IP"

 

[Melbournee]

Misa

Just opened my first Offset account yest. Its with Commbank and if anyone's interested its called MISA(Mortgage Interest Saver acc).

Before this account I was putting any extra income into my loan account. I have now withdrawn half of these extra funds from loan acc and put these into the offset. Are these funds not usable for investment purposes now? Since they have been "redrawn".

For now it shouldnt matter since the only loan that I have is a PPOR one and I am going to live in this house for a few more years at least but what about the scenario of an IP if I am successful in buying one? Can I pay the deposit with these funds. Just want to plan it before another IP LOAN etc makes it even more complicated.

Thanks for any help in advance!

 

[neK]

Speak to your accountant.

See if they can link the money withdraw to another investment

Also tax records only need to be kept for 7 years i believe.

 

[RumpledElf]

Too true. Majority of people ive met all start with the mentality "This is my PPOR and when i want a bigger house im going to sell it". Ive lost count of how many people have retracted those words and asked "how do i convert this to an IP"

Or people like us who really really wanted to sell it, couldn't, and next thing its grudgingly an IP but with a P&I loan and barely 30% LVR - and no offset and a slowly growing redraw balance. Couldn't get much worse.

I still want to sell the darn thing (its a terrible rental but was a good PPoR) but its currently paying for close to both mortgages and the extra money really is quite nice ...

 

[Dylan33]

I have a LOC loan on my PI with a credit card. the credit card is payed out at the end of each month from my ppr account. Where all my income goes into and accrues through the month. The difference between income and outgoings builds up in the ppr account and can be used as a redraw.
Is this the same thing as an offset account? Is it just another way of doing it without setting up another account?

 

[kaybie]

I have a LOC loan on my PI with a credit card. the credit card is payed out at the end of each month from my ppr account. Where all my income goes into and accrues through the month. The difference between income and outgoings builds up in the ppr account and can be used as a redraw.
Is this the same thing as an offset account? Is it just another way of doing it without setting up another account?

No! It isn't...
My understanding: An offset account is a separate account with YOUR money in it. The balance is linked to the chosen loan account so that you pay loan interest only on the difference. But the money in the offset remains yours.
With a line of credit (LOC), where the balance is negative (ie you owe them money, which is almost always) - any money you put in there actually belongs to the bank. You can take money out again, up to the credit limit, but it is ultimately theirs and they can shut the whole thing down any time they want and take the money there, and you still owe the gap. Not that they usually would, unless disaster struck, but they can. It's in the fine print.
In fact it's not even real money you have in there, it's just less debt.
A LOC is like a huge credit card that is never paid off in full. The interest rate is heaps lower than a credit card - sure - because your property is the security. You are doing LOC somewhat right because you are ending up with a lower debt balance in there each month than you started with, thus reducing your interest. But always remember - that money you put in there is no longer yours. Not really.

 

[Rolf Latham]

Hiya Dylan

Welcome !

Depends if the property is an IP or a PPOR ?

The post seems confused on this issue, pls clarify?

ta
rolf

 

[Dylan33]

Rolf. The account it's accruing in is the ppor. Thus giving me less non tax deductible debt

Thanks for your comments Kaybie.

 

[josko]

Hi Dylan, welcome to the forum,

In that case your LOC is doing what it is supposed to do and it is right to have it attached to your PPOR in your case.

HOWEVER In answer to this question:

Is this the same thing as an offset account?

A LOC is different to an Offset account in regards to ownership but not use.

A LOC is owned by the bank in such that: The bank can pull your LOC anytime they wish. The LOC is owned by the bank as it is a release of equity from your property.

An offset account has YOUR money in it and is completely seperate to the loan. Like a savings account.

Regards JO