Offset Account

[Trance]

Hi all,


I know the real basics of Offset account but would love to read and understand more on it. Could anyone elaborate more on it please?
What is its real purpose?
what are the advantages?
How does this work?




many thanks

 

[yo yo ma]

An offset account is a savings account where the balance is offset against the loan amount. So, instead of paying you interest, it reduces the amount you have to pay on the loan. It is tax effective because you don't actually earn any interest on the money. Also, you can access your money at anytime without affecting the deductibility of the loan.

It works very well in conjunction with interest only loans, plus, can be used with a credit card, utilising the 55 day interest free period. See an example below.

http://www.echoice.com.au/mortgage/home_loans?pn=/homeloantypes/offsetaccount.html

 

[LynnH]

Trance

A very simple example ...

You have a loan of $100,000 and have $20,000 in an offset account - you therefore only pay interest on $80,000 (assuming that the offset account is a full offset). And you can withdraw the money in the offset account at any time without affecting the deductibility of the interest on the loan account (assuming the loan account is for investment purposes).

Cheers
LynnH

 

[tubs]

Also worth noting that it doesnt change the amount of your repayments. Your repayments will be the same, but a greater $amount will be put towards payment of the capital, so you pay the capital down faster.

 

[Peter_Tersteeg]

Actually tubs, on an interest only loan, it does change the repayment amount. On a P&I loan the contracted repayment amount does not change. The same applies if you use a loan with extra repayments and redraw facilities instead of an offset account. There are exceptions, but this is the most common scenario.

The biggest advantage of an offset account (aside from saving you interest), is that it keeps your savings (which you've paid tax on) physically separate from the loan (to which no tax is applied). This is useful for investors as is separates personal money (the offset) from investment money (the loan), which removes any ambiguity about the purpose of that money and what it can be used for.

Being clear on the type of money in separate accounts ensures that your accountant knows what can and cannot be claimed as a deduction, which may save problems with the ATO.

 

[Trance]

thanks for your replies guys. I take it that not all lenders provide with the offset option?

if this is the case, is it wiser to transfer the loan to another lender or just wait out and merge the loan with say the purchase of the next investment property?

 

[yo yo ma]

I take it that not all lenders provide with the offset option?

Most do; check that it is a 100% offset account rather than a partial offset though.

It would depend on the amount of the offset, break fees, interest rate, when you are going to purchase next etc as to whether it would be beneficial for you to change now or wait... speak to your broker/ lender.

 

[Peter_Tersteeg]

Keep in mind that not all offsets are created equal.

I wouldn't suggest 'merging' anything with the next investment property. If you do this with most lenders, they'll try to cross-collateralise everything. Also keep in mind you don't necessarily need to refinance to get the right structure in place.

Do a search on X-coll, cross collateralise or look here...

http://www.somersoft.com/forums/showthread.php?t=43946