question about the offset account

[blahblah]

Hi:
Anyone can explain me about the offset account?

Understood the offset account is used to reduce the balance on mortgage account and therefore reduce the interest paid every month.

However is the money in offset account being transferred into mortgage account? If not, is it better to put the extra money into offset account or mortgage account directly as the extra repayment?

Also what happen when the amount in offset account is greater than the balance in mortgage, since balance in offset account keeps increasing and eventually the balance in mortgage is dropping down?

 

[Perp]

For flexibility and to retain a tax deduction, you're better off putting it in the offset than paying down the loan. If you pay down the loan and redraw it, the redrawn funds are again subject to the purpose test and you can lose tax deductibility.

Example: You own IP and have a mortgage of $200K, interest is deductible. You inherit $200K and want somewhere to park it for a while, whilst looking for a PPOR (for example).

1) You put the funds in the offset, pay no mortgage on the IP loan, and can redraw it to buy a PPOR, and the interest on the $200K remains deductible.

2) If you put those funds in the loan account, then draw the funds out again for a private purpose (eg PPOR, or big holiday, or car, etc), then the interest on the $200K is no longer deductible, because the purpose of the funds is no longer for investment.

For more on loan set-ups, I've written a blog addressing a number of FAQ on this topic.

 

[Peter_Tersteeg]

Point 2 of Tracy's post is basically describing that the the offset account keeps your savings separate from a tax deductible loan, thus isolating the use of the money.

* Money on the loan account is for investment purposes only.

* Money in the offset account is for personal use. It's place in the offset account to reduce interest rather than park it in a savings account.

The interest you'd earn in a savings account is less than the interest saved in an offset account, plus you pay tax on interest earned.

By keeping the uses of your money separate, you'll never had an argument with the ATO as to what's tax deductible an what's not.

 

[gooram]

To answer your second question, what happens when the offset balance exceeds the loan balance... nothing.

You'll pay no interest on your loan, but you would be wise to move any funds over and above the loan amount into an interest bearing account. By this time however you would have bought another property and you'll no doubt put it towards that