Offset Question

[ad5]

I was thinking on refinancing my existing PPOR to get access to equity (take up to 80%) or a future property purpose. I currently have an offset account for our current loan.

As an example, lets say I refinance and get access to an additional $100k. It may take a while to find this property (perhaps over 12 months) and use these funds to cover fees deposit etc. Obviously I have to start payments on this additional amount (interest only at least). So it will currently cost $5k per annum in interest alone for this money. If I put it in the offset account, it will reduce interest charged on the other loan by an equivalent amount, so balancing each other out. After a period of time, am I able to access the interest saved by using the offset? e.g after 12 months of having $100k in offset, can I redraw $5k from my other loan that is tied to the offset, or will it simply reduce the life of the loan? Am I making sense here?

 

[Brady]

Don't mix the funds. Unless it's a clear seperate offset I would look at either a LOC or putting the excess funds back into the loan. Otherwise you will have borrowed funds in with personal savings in the offset.

 

[D.T.]

Assume you still have debt on ppor
Get the 100k as a seperate account so that you dont mix personal and investment interest.
Create a seperate savings account for the 100k to get deposited. Make this the offset for that new loan account where it can sit while you're looking for a property.
Offset = loan account balance = 0 repayments.

Terry wont approve but everyone else will.

 

[thatbum]

Why not just use a line of credit facility?

 

[Peter_Tersteeg]

Forget the offset entirely. It certainly can be done, but likely it'll get you into trouble. There's simply too much risk you'll mix personal and investment funds, or have the account offsetting personal debt when the money should be used for investments. Technically you can use an offset with equity, but there are risks if you're not clear on what you're doing.

Instead, leave the money in the redraw facility of the equity loan. The equity loan can be a regular interest only home loan, or a line of credit (which tends to be more expensive and has some other drawbacks, but a few benefits as well).

An offset account should be reserved for income such as your salary, share dividends and rental income. Leave money gained from equitiy in a redraw facility.

 

[kathleneE]

I would agree to not mix your savings with the equity release. Keeping the funds in the redraw is best as you are reducing your interest repayments on it until you need to use it. A line of credit although convenient is a higher interest rate. Unless you want to use it as a revolving facility it wouldn't be worth it to have.

 

[thatbum]

A line of credit although convenient is a higher interest rate. Unless you want to use it as a revolving facility it wouldn't be worth it to have.

I thought you could get LoCs that were essentially the same interest rate.

 

[Corey Batt]

I thought you could get LoCs that were essentially the same interest rate.

You can in many cases, the odd one which is cheaper too (if you x-coll everything).

I wouldn't say that the primary negative of LOC's are the pricing, more the repay on demand and ability to cancel limits at the will of the lender.

This has sent many people to the wall in the past, particularly during the GFC.

 

[Terry_w]

I was thinking on refinancing my existing PPOR to get access to equity (take up to 80%) or a future property purpose. I currently have an offset account for our current loan.

As an example, lets say I refinance and get access to an additional $100k. It may take a while to find this property (perhaps over 12 months) and use these funds to cover fees deposit etc. Obviously I have to start payments on this additional amount (interest only at least). So it will currently cost $5k per annum in interest alone for this money. If I put it in the offset account, it will reduce interest charged on the other loan by an equivalent amount, so balancing each other out. After a period of time, am I able to access the interest saved by using the offset? e.g after 12 months of having $100k in offset, can I redraw $5k from my other loan that is tied to the offset, or will it simply reduce the life of the loan? Am I making sense here?

As a tax lawyer I would say your interest on that $100k would not be deductible.

 

[ZachAnSel]

As a tax lawyer I would say your interest on that $100k would not be deductible.

Hi Terry,

Let say the damage is done..
Assuming the main loan have re-draw, can we repay 100k back to the loan and utilise the re-draw as LOC or different account (eg. lawyer trust account) ??

 

[Terry_w]

Hi Terry,

Let say the damage is done..
Assuming the main loan have re-draw, can we repay 100k back to the loan and utilise the re-draw as LOC or different account (eg. lawyer trust account) ??

Would depend on the circumstances. You cannot reimburse yourself.

 

[ad5]

Thanks for the info guys. The idea being it would be a separate equity loan. If I am making interest only repayments on the loan before it is used, I was hoping to be able to effectively get back those payments (by using offset) to have maximum cash available.

e.g After 12 months of the $100k equity loan sitting in offset account, I would have saved $5k in reduced interest charges on my PPOR loan, but made $5k IO payments on the equity loan. Does that mean I am entitled to redraw that $5k out as im now ahead on the PPOR loan? So at the end of 12 months my loan payments would have been $5k, however I would have $105k available.

 

[Terry_w]

Thanks for the info guys. The idea being it would be a separate equity loan. If I am making interest only repayments on the loan before it is used, I was hoping to be able to effectively get back those payments (by using offset) to have maximum cash available.

e.g After 12 months of the $100k equity loan sitting in offset account, I would have saved $5k in reduced interest charges on my PPOR loan, but made $5k IO payments on the equity loan. Does that mean I am entitled to redraw that $5k out as im now ahead on the PPOR loan? So at the end of 12 months my loan payments would have been $5k, however I would have $105k available.

I think you misunderstand how these loans work

On an IO loan the interest is calculated on the daily balance and added to the loan monthly. With a 100% offset account the amount in the savings account offsets the daily interest.

Same with a LOC.

If you had a $100,000 loan with $100,000 in the offset there would be no interest.

If you had a LOC with a $100,000 limit but nil drawn there would be no interest.

 

[ad5]

I think you misunderstand how these loans work

On an IO loan the interest is calculated on the daily balance and added to the loan monthly. With a 100% offset account the amount in the savings account offsets the daily interest.

Same with a LOC.

If you had a $100,000 loan with $100,000 in the offset there would be no interest.

If you had a LOC with a $100,000 limit but nil drawn there would be no interest.

I understand how offsets work but not the scenario with an IO loan where the amount in the offset equals the loan. Would the bank simply not take out any repayments on the loan until it the offset account is less than loan amount?

 

[Corey Batt]

I understand how offsets work but not the scenario with an IO loan where the amount in the offset equals the loan. Would the bank simply not take out any repayments on the loan until it the offset account is less than loan amount?

That's correct. As the interest incurred would be $0, no charge would be made.