Offset account questions

J

J_aco

Hi all,

I'm new to property investing so please excuse my silly Qns. Have read prev posts (especially Terry's) and just trying to get my head around this.

*Personal situation:

- No PPOR loan (and do not intend to buy a PPOR any time soon), no personal/car loans.
- Have $150k in cash

- In the process of acquiring IP1. Property price $325k. Borrowing 90% with I/O, standard variable and offset.
- Likely to acquire IP2 within next 2 months. Borrow 90% with I/O, fixed.

* Re: offset acct. What I think I'm aware of is:
- Do not put borrowed funds into offset acct
- Offset acct is savings acct/treat funds inside as cash

* Questions:

1. When IP1 settles, what funds to park into offset account?
- wages
- rental income
- lotto winnings (for eg)
- inheritance (for eg)
- dividends (? - will that contaminate the loan?)

2. To avoid contaminating the loan:
- The funds in offset should only be used for investment-related expenses? (IP's annual insurance, council rates, maintenance etc)
- Can I use the funds in offset to pay for personal expenses/credit card bills?

3. If answer is no, then where do I have the money for daily expenditures? Do I deposit 80% of wages into offset and keep 20% out? Originally I'd think to have every single income credited directly into the offset acct. (Sorry this must be a dumb qn to you guys)

Thanks and appreciate any feedback/comments!
 
An offset account is just a savings account. You can put anything in it and it will have no tax issues (other than reducing interest).

You just cannot borrow to park funds in a savings account.
 
Park all income in the offset - you can move funds in and out of it without any implications.

It's when you put extra funds into the principal and redraw that you can run into troubles.

Cheers

Jamie
 
J_aco said:
1. When IP1 settles, what funds to park into offset account?
- wages
- rental income
- lotto winnings (for eg)
- inheritance (for eg)
- dividends (? - will that contaminate the loan?)

2. To avoid contaminating the loan:
- The funds in offset should only be used for investment-related expenses? (IP's annual insurance, council rates, maintenance etc)
- Can I use the funds in offset to pay for personal expenses/credit card bills?

3. If answer is no, then where do I have the money for daily expenditures? Do I deposit 80% of wages into offset and keep 20% out? Originally I'd think to have every single income credited directly into the offset acct. (Sorry this must be a dumb qn to you guys)
Click to expand...

It'll help if you stop trying to think of it as an offset account. It's really just a savings account with some special features that reduce the interest on the loan instead of earning interest.

The only money that you should not put into an savings/offset account is money you've borrowed. Any money you make or earn from job, rental, capital gains, prizes, etc, can all go into the savings/offset account.

You often can use borrowed money for investment related expenses, but most people do choose to use money from the savings/offset account for these purposes. It's simpler and less likely to make a mistake because there's some investment related costs that you should not use borrowed funds for (such as paying interest).

Your day to day expenses (food, bills, entertainment) should always come from your savings/offset account. You should never borrow money for this.
 
If you're good with money you could use a credit card with rewards points for all your everyday expenses - and then clear it once a month from the money in your offset.

The benefits are twofold. You reduce your monthly interest a little and also earn points on your credit card.

A lot of banks that offer an offset account also provide a free credit card as part of their home loan package.

Cheers

Jamie
 
Peter_Tersteeg said:
The only money that you should not put into an savings/offset account is money you've borrowed. Any money you make or earn from job, rental, capital gains, prizes, etc, can all go into the savings/offset account.
Click to expand...

Where would you park the remaining borrowed funds leftover to purchase a property like 5k?
 
A question with a similar flavour:

We have the following accounts:
- Offset (linked to IP1 loan)
- Investment property loan (IP1 variable)
- Investment property loan (soon to be IP2 fixed)
- LOC 1
- LOC 2

Question: How to put aside a set amount of money each month, yet have it still work towards offsetting interest? Can anyone suggest anything?

We put all our money in the offset account. BUT this doesn't help me know if we are saving a set amount. E.g. We want to save all my income, spend only husband's income. I wish I could just have two offset accounts! I assume I *can't* put my money into the LOC because it will like cause contamination?

Last resort: I could write down how much the offset balance should be increasing each month.
 
You could just convert the LOC to a regular I/O variable loan with an offset account. This might work depending on what it was or is being used for.

Some (very few) lenders will allow the offset account to have multiple sub accounts which would probably work as well.

BTW, which properties are the two LOCs secured against?
 
Hmmm, I know one is against my PPOR (which I haven't listed in any of the accounts above, because it's paid off). I think the other one is too, but I can't remember. I know they aren't cross-collateralised though.

I will investigate the options you mentioned. Thank you.
 
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