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 !