Serviceability - Offset v Term Deposit

[JoshyBoi]

Query I have following on from Sash's comment:

Couple of suggestions to increase your serviceability...


...
11. Rather than keeping funds a Offset look to put it in a deposit account as this will increase your income via interest.

from this thread.

This is probably more a Q for the brokers...but is that true?

I would have thought have 100,000k in an offset where the loan is at 7% would be better then having 100,000k in a term deposit of 6%...

In the offset scenario, you are not gaining any extra income but you are not paying 7% interest on that 100,000k

In the term deposit scenario, you are paying interest at 7% on that 100,000 (which could have been in the offset account) and earning 6% interest from having it in a term deposit.

If Sash's comment is correct, is it to do with the serviceability calcs, ie. banks will take into account entire loan and current interest rate and disregard what in the offset?

Appreciate anyone's thoughts...

Lj

 

[Rolf Latham]

when cash is in offset it SAVES interest so thats like putting cash into the LOC and you can simple spend it

Some lenders will look at interest from TDs and the like where you can show some history of having had rtns via tax rtns or the like. BUT , if the deal is that skinny, then you have some bigger issues in any case ?

ta
rolf

 

[marg4000]

Don't forget to take tax into account.

If the offset account is attached to a PPOR where the interest is not deductible, the 7% is pure savings. You will pay tax on the interest on a term deposit unless you have it in the name of a very low income earner who pays no tax.

If the offset is attached to an IP loan the result is probably line ball, again unless the term deposit is in the name of a low income earner where no tax is payable.
Marg

 

[Peter_Tersteeg]

Lenders will consider income from other sources such as share portoflios and term deposits if the income can be demonstraited via a few years of tax returns. Lenders want to see what the effect of the income in your tax return.

Realistically having cash in an offset or in a term deposit is unlikely to have much effect on your serviceability. In most cases it's far better to have it in an offset account for the tax implications as suggested by Marg, or perhaps put it into another investment depending on your objectives and risk profile.

 

[JoshyBoi]

BUT , if the deal is that skinny, then you have some bigger issues in any case ?

Question was purely because I wanted to understand how it worked as I thought the difference would be negligible =)

Margs point is good, if you have the PPOR thats the best spot to stick it.

Cheers for the responses

 

[alexlee]

Margs point is good, if you have the PPOR thats the best spot to stick it.

Depends on where the money came from. If it's from refinancing an IP, for example, putting it in the PPOR offset kills the deductibility.

 

[Rolf Latham]

I believe some clarification around the orginal question may be in order

Serviceability is generally used as for "what a lender will lend me based on my income position"

Personal Affordability is what I can afford and is often different to what serviceability.

ta
rolf

 

[JoshyBoi]

Definitely agreed re the distinction Rolf - I know (and I think many people know) they can personally afford more then the bank's think I (or they can)!

Not sure I understand the clarification...but the reason I was asking waas to understand the distinction and to decide whether I should open up one of those "bonus" saver accounts* and make frequent deposits into there or just keep lumping it into an offset...I think I'll stick to my original plan and all into the offset until I need it for a deposit

*Had seen one of the bonus saver accounts @ 6% interest if you make minimum monthly contributions...not bad if you fixed rates at 4.99%

 

[alexlee]

*Had seen one of the bonus saver accounts @ 6% interest if you make minimum monthly contributions...not bad if you fixed rates at 4.99%

You make 1%. On 500k in cash you make 5k. Hardly impressive, considering what you could do with that 500k instead. On smaller amounts, is it really worthwhile? If you're going to compare it to recent low fixed rates, why not compare it to the 5 year 8% term deposit that appeared last year?

 

[JoshyBoi]

You make 1%. On 500k in cash you make 5k. Hardly impressive, considering what you could do with that 500k instead. On smaller amounts, is it really worthwhile? If you're going to compare it to recent low fixed rates, why not compare it to the 5 year 8% term deposit that appeared last year?

cos i didnt see it?

I never suggested having 500k in there, nor locking money away for 5 years...neither I would do...

Its about making the most efficient use of the money whilst saving it for something else...

Thanks for the helpful contribution tho!

 

[amativus]

Most lenders will only allow you to partially offset whilst a loan it is offsetting is fixed. Variable products and fixed products operate in different ways and are Priced by a bank accordingly. IMHO I would personally park any surplus cash I have against my ppor against a variable product. This has multiple benefits, greater returns than a TD, tax free, somewhat hedging mechanism against interest rate fluctuations. Have a look at the offset facility and make sure that it is a true offset which you can use as an everyday account as opposed to just another account associated to the loan.