Offset accounts

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From: G Chaggar


hi all.

could someone please correct me if i am wrong.
if i have a home loan worth $105K, and i was to put $100K in the offset account, the interest would be charged on $5K. meaning that the homeloan would be paid out pretty quick.
then i could go and get a LOC of about 80%, effectively giving me $100K plus 80% of the value of the property.
this would be better than putting the $100K in the loan and paying it off that way? as i see it, if i was to put the %100K in the loan itself, then i would only be left with 80% LOC.

thanks in advance

Gurbinder
 
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Reply: 1
From: Owen .


You said >>>if i have a home loan worth $105K, and i was to put $100K in the offset account, the interest would be charged on $5K. meaning that the home loan would be paid out pretty quick.

Pretty quick is a relative term, depending on how much you earn and how much you can spare. Even if there is no interest to pay you still have to pay out $105K and with after tax, after cost of living dollars, it's going to take a while.

>>>then i could go and get a LOC of about 80%, effectively giving me $100K plus 80% of the value of the property.

Again this depends on you serviceability. If you can only afford to borrow a $100K and this is 80% of your new IP, then you IP can only cost $125K. This will only use $25K of your savings. I wonder what you will do with you other $75K? Pay off your IP loan?

>>>this would be better than putting the $100K in the loan and paying it off that way? as i see it, if i was to put the $100K in the loan itself, then i would only be left with 80% LOC.

But you are forgetting that the equity you have in your house can be used for just the deposits on your IPs. The balance will be secured against the IP itself.

Simplify. If you pay off your home loan with your $100K (plus the $5K extra) a few things happen. First, your personal cost of living is reduced hugely (no more mortgage payments). Second, you get all your equity available in a growth asset (your home) to use as you please. Third, your loan serviceability goes up because your cost of living goes down.

You can then get a LOC up to 80% of the value of your home, secured against your home for use on IP deposits and costs. Go shopping for an IP and secure a loan against 80% of it's value with the balance in your LOC. Renovate/add value/maximise rent and then refinance based on new improved valuation. This will release the IP's equity to buy more or pay down your LOC. Repeat.

All this borrowing is now fully tax deductible unlike your original $105K home loan. And it can all be done immediately instead of when you eventually pay off your home loan.

This is the classic property investment process as far as I see it.
 
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Reply: 2
From: Sim' Hampel


Umm... no.

If you have an offset account with $100K in it against a $105K loan, then you still have a $105K loan to service (albeit with very little interest to be paid). You cannot set up another LOC against this part of the property until you discharge the existing mortgage.

Your options depend on whether the original loan was for personal or investment debt. I will assume that it was for personal (ie. buying your own home which you live in).

I see your choices as:

1. Pay off the loan ASAP (as the interest was non tax-deductible), then refinance with a LOC which you then use to fund investment puchases, making the interest tax deductible.

2. Keep the offset account maxed out to minimise your non-deductible interest expenses.

Now with the offset account, what happens with it fully offset depends on whether your loan repayments are P&I or IO.

If they are IO then you are not really getting much benefit from the offset account, other than to reduce the amount of interest you pay (possibly to zero). Because you never decrease the loan principal, you never gain equity in the property. However, this may be your intention, letting capital growth give you equity. You are essentially just increasing your cashflow due to smaller interest payments.

P&I loans tend to work better with offset accounts, as you still make your same monthly (or fortnightly or whatever) repayments. Instead of the payment being part principal, mostly interest (which leads to slooooow repayment of principal), because of the offset account minimising the interest component, practically all of the payment goes towards the principal.

Note that typically with offset accounts, you still need to fork out the same payment amount, regardless of whether you have enough cash to fully offset the interest repayments or not. Be aware of this, as you may not actually get any extra cashflow from keeping the money in the offset account.

This is actually not a particularly simple subject, I strongly suggest that you find a good independant mortgage broker and ask them to explain to you how offset accounts work in various situations and configurations.

3. Forget paying back the loan any more quickly than normal (if at all) and use the $100K to fund additional investments which pay for themselves and your existing loan repayments all by themselves !!

As always, I may have some of the details wrong here, and each lender may treat offset accounts differently too... so please seek professional advice !

 
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Reply: 2.1
From: Rolf Latham


Hi SIm

Interestingly some lenders will NOT give you an offset account against an I/O Loan and will force you to take a LOC product. St George is a good example


Rolf
 
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Reply: 2.1.1
From: Victor Mann


you do not need to pay out your home loan completely before you refinance IF your mortgage balance is less than 50% of the new refinance then the borrowings and purposes are business related and you should sign the business purpose declaration, then you fall outside the CCC .
 
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Reply: 2.1.1.1
From: T W


There are also tax benefits with using a LOC rather than 100% offset.

Eg. You have a home valued at $200,000 and have saved up $100,000 in your 100% offset account.

You then want to buy an investment property worth, say, $200,000. You will need 20% deposit to avoid mortgage insurance. = $40,000. You have 2 choices on how you do this.

Choice 1.
Use 20% deposit taken from the 100% offset account. The interest on your home loan will then increase as you have taken $40,000 out of your offset account. If interest was 7%, then you would be paying $2,800 extra per year.

Choice 2.
Change to a LOC loan and withdraw (ie ‘borrow’) the $40,000 from your LOC. This money is now ‘borrowed’ money so the interest will now be tax deductible. If the interest rate was 7% this would allow you to claim another $2800 per year. You might get about half of this back in tax, therefore you would be $1400 + $2,800 better off each year!

Some lenders, such as St. George, allow sub accounts to be set up to keep this separate from your other non-deductible debts.

This is my understanding, not advice.

Regards

T
 
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Reply: 2.1.1.1.1
From: G Chaggar


thanks to everyone that has replied. made the scenario clearer now
 
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Reply: 2.1.1.1.2
From: Michael G


Hi,

Why not just put that $40k back into the loan, redraw it down out of the loan account and claim the interest as a deduction and still save the extra % you would be charge having it as a LOC? Just a thought.

You don't even have to refinance either.

Michael
 
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