Using offset account for interest free mortgage

[Earnest1]

Longtime lurker here and still very much in a learning phase. I thought I would throw my hat in the ring and ask for some advice, before I kick off my investment career. This forum is quite remarkable and have been astounded by the people who take the time to put forth their advice, so I thank those people in advance.

I am looking at buying my first home ever. I plan to take advantage of the FHOG and stamp duty exemption here in Queensland, which means I have to live in the property for 12 months in total, before I can turn it into an investment property. The saying I have seen around here says that the places we invest in are generally not the places we want to live. However this particular property is one I am buying to eventually settle down in and live in long term (10-20 years). I just have the opportunity to live elsewhere for cheap after the first 12 months of live-in ownership to pursue my work career for a few years elsewhere in the state. So the buying of this house is primarily a lifestyle choice and an investment choice second.

Would it be worthwhile to take out a P&I mortgage with an offset account, park the full value of the mortgage in the offset account and pay down the principal directly with no interest to be paid. I know most people here shirk at P&I loans as it restricts your cash flow and tax deductibility if I was to empty the offset account.

I realise there are a number of other investment scenarios you could pursue with the value of a house in cash, but I thought I would ask the question at face value to find out if it is a stupid idea or not.

 

[Peter_Tersteeg]

If there's any chance of this property becoming a investment property in the future, you should set it up to look like an investment loan right from the start. This will give you the most flexibility and tax benefits in the future.

Use an interest only loan to purchase the property. Put an offset account against this property an park any additional savings there until you've got a better use for those funds.

 

[Jamie M]

I'd do exactly what Pete said - it provides for optimal flexibility.

If you don't have any non-deductible debt, it might be an idea to get into the habit of placing the would be principle repayments into the offset account each month (unless you're doing something else worthwhile with this cash).

Cheers

Jamie

 

[Rolf Latham]

Would it be worthwhile to take out a P&I mortgage with an offset account, park the full value of the mortgage in the offset account and pay down the principal directly with no interest to be paid..

Hiya

If you have cash to that extent, youd want to be careful with what your future goals are .

How much cash do u currently have to park against the loan ?

t
arolf

 

[Aaron_C]

I generally only recommend P&I loans if a) the borrower is a terrible saver/budgeter, or b) there is a family pledge involved and the parents' loan should be paid out asap. Other than that offset+Interest-only is the best bet.

 

[Pa1nter]

Reading between the lines,
Are you saying you have the cash to buy this house outright??

If you have I would purchase the house with the cash and I would do this because it is your PPOR and you cant claim on it anyhow.

 

[Rolf Latham]

Reading between the lines,
Are you saying you have the cash to buy this house outright??

If you have I would purchase the house with the cash and I would do this because it is your PPOR and you cant claim on it anyhow.

Most posters here are of the never sell brigade.

If the op buys the place with zero loan, and subsequently upgrades and borrows for the new ppor, and retains the now old ppor as an IP, they may have a serious tax issue to consider.

Considering the future is one of the most important structuring tools that most don't ever consider...
Ta
Rolf


Ta


Rolf

 

[Pa1nter]

Most posters here are of the never sell brigade.

If the op buys the place with zero loan, and subsequently upgrades and borrows for the new ppor, and retains the now old ppor as an IP, they may have a serious tax issue to consider.

Considering the future is one of the most important structuring tools that most don't ever consider...
Ta
Rolf


Ta


Rolf

You are the master Rolf and I am but a simple learner but,
How can someone have a tax issue if they don't have a loan against it?
Isn't it just a matter of starting a new bank account for that house when it becomes an IP?

 

[Rolf Latham]

You are the master Rolf and I am but a simple learner but,
How can someone have a tax issue if they don't have a loan against it?
Isn't it just a matter of starting a new bank account for that house when it becomes an IP?

thanks for the kind words, just more experience in this arena thats all.

If the OP buys another PPOR with borrowings, the borrowings are for private use and totally NOT deductible.

Meanwhile the income from the former IP, is now taxed at a high level because there is no interest deductible.

I will be back with some eg numbers

ta

rolf

 

[Rolf Latham]

You are the master Rolf and I am but a simple learner but,
How can someone have a tax issue if they don't have a loan against it?
Isn't it just a matter of starting a new bank account for that house when it becomes an IP?

Model

Assumptions. 38 c in the dollar tax rate, serviceability is strong, income proof is available,, and OPs risk tolerance to debt is mid range.

Variable IO loan product at say 6.5 %


500 k Initial purchase, 400k IO loan with 400 k in offset ( using a proper IO offset for ppor not Like St George sad product)

Interest payable each month = zero, same as if we owned the property


Next week we buy a NEW 500 k PPOR and turn theold PPOR into an IP

Using my model, we borrow 400 k again (in reality we would need to borrow 520 if we used up all previous cash), BUT we move the cash from the offset from the old PPOR to the NEW ppor.

Interest payable on new PPOR 400 k portion = zero

Interest payable on the old PPOR now IP = 26 000 per annum.

The 26 000 per annum @ 38 c in the dollar is worth near 10 k each and every year, and has a compounding effect, and is worth a bus load more than people think, as I will estimate later

------------------------------

Same model but OP boughthouse with cash, so kitty is empty

Interest payable zero.

All the same as my preferred structure


Next week we buy a NEW 500 k PPOR and turn the old PPOR into an IP

We have NIL cash left,

So borrow 400 000 ( again in reality would need 520 but just want to keep the number similar for direct comparison)

Interest payable on new PPOR = 26 000 all non deductible

Interest payable on the old PPOR now IP = zero


So the 2 scenarios side by side, run over a full PI loan term

400 k new PPOR debt using IO offset model paid out in 16 instead of 30 years.........gross numbers below



Using the buy the PPOR with cash method 2529 a month over 30 years

Using the IO Offset method and getting a 1515 tax variation from the tax office, gets you around 830 a month extra back from the tax man ( 26 000 interest at 38 x approax)

You take that 833 a month and "plow it into the new PPOR mortgage" ( best to think hard about what to do with the extra etc, into offset other investments etc)

14 years of repayments approx saved

2529 x 12 x 14 = $ 425 000 saved



yes, this is a little rubbery, and yes the 425 000 isnt todays money, and yes circumstances change, but I just wanted to show how a seemingly weeny and " insignificant" finance structuring decision can matter a bunch. My basic rule with finance structure is to be flexible to cover for things you arent yet sure of.




Thanks Painter for the opportunity to bring this up, we talk about it lots and lots on the forum but rarely do we show the long term effect.


In the above scenario Id even consider pushing it harder with an initial 90 % lend if the OPs risk tolerance to "debt" is higher. I know its counter intuitive...............and that is why every borrower should run some detail models and finance structure /mortgage structure planning before they commit to a structure !


ta

rolf

 

[Pa1nter]

Thanks for that Rolf,
What threw me off was the OPs said However this particular property is one I am buying to eventually settle down in and live in long term (10-20 years).

I was not given the impression by his initial post that he would be buying another PPOR so that is the reason I posted my thoughts.

If he was to not buy another PPOR is your thoughts the same?

 

[Bigtone]

Thanks for that Rolf

If he was to not buy another PPOR is your thoughts the same?

Best to keep options open, life often throws changes that you didn't plan for.

It costs u basically nothing to have the flexability so y not keep the option open?

 

[MaxwellSmart]

Thanks for the info Rolf & others. It has been helpful.

Similarly...
Im looking to interest only purchase by the end of the year and park 80% of the Purchase price in an offset. I am planning to live completely out of the incoming rent in my offset for a year before round 2. Purely investment.

I am all ears?

Thank you.

 

[Peter_Tersteeg]

Im looking to interest only purchase by the end of the year and park 80% of the Purchase price in an offset. I am planning to live completely out of the incoming rent in my offset for a year before round 2. Purely investment.

I am all ears?

That's a pretty vague plan without further financial details. If the rental income is enough to live off and service the remaining loan it's fine. Putting surplus funds in to the offset works well for drawing out living expenses.

It sounds like the property will be massively positively geared and thus you'll likely have a tax bill. Make sure you retain enough funds to meet this commitment at tax time.

 

[MaxwellSmart]

Thank you PT. I am aware that I will have a tax bill.

The tax will only be paid on the rental income received?

A proportion of the rental income will remain undrawn for that time.

Thanks again.

 

[Rolf Latham]

Thanks for that Rolf,
What threw me off was the OPs said However this particular property is one I am buying to eventually settle down in and live in long term (10-20 years).

I was not given the impression by his initial post that he would be buying another PPOR so that is the reason I posted my thoughts.

If he was to not buy another PPOR is your thoughts the same?

Yes, I would still recommend the IO with offset, because there is no obvious downside unless money burns a hole in your pocket. There are rare circumstances where having that level of cash presents a risk to the borrower, for eg if they run their own business and are at risk of being sued.

In addition, what I have learnt in life comes nicely packaged in a John Lennon Line

Life is what happens to you while you're makin other plans.


Good assumption to live by I feel

ta

rolf

 

[BMan]

Thanks for that Rolf,
What threw me off was the OPs said However this particular property is one I am buying to eventually settle down in and live in long term (10-20 years).

I was not given the impression by his initial post that he would be buying another PPOR so that is the reason I posted my thoughts.

If he was to not buy another PPOR is your thoughts the same?

Best to keep options open, life often throws changes that you didn't plan for.

It costs u basically nothing to have the flexibility so y not keep the option open?

Yes, I would still recommend the IO with offset, because there is no obvious downside unless money burns a hole in your pocket. There are rare circumstances where having that level of cash presents a risk to the borrower, for eg if they run their own business and are at risk of being sued.

In addition, what I have learnt in life comes nicely packaged in a John Lennon Line

Life is what happens to you while you're makin other plans.


Good assumption to live by I feel

ta

rolf

like everything for every one it would depend on circumstances and as such everyones are different

IMO for me i would go IO with offset but if you could guarantee you wouldnt have another PPOR AND required less loans for servicing issues to be able to borrow more then you would probably pay it off
you could then redraw the equity out of it for IP making most of it tax deductible anyway


also kudo to Rolf for that indepth post about offsets i think there really needs to be a sticky about the benefits of offsets vs redraw LOC etc
so many people still cant grasp it