When to use offset and redraw?

Discussion in 'Where to Buy' started by h@pbp, 13th Jan, 2012.

  1. h@pbp

    h@pbp Member

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    Hi All

    Long time follower of ss but first time poster :)

    I have read a number of posts in relation to this topic already and am somewhat :confused: so apologies in advance...

    My simplified understanding is as below…I would be grateful if someone can please shed light in respect to tax deductibility…

    “Irrespective of whether the property is a PPOR or IP, you should ALWAYS in the first instance, put surplus savings, say $100k, into an offset account (attached to the loan).

    And when you want to draw on the $100k savings, if it is for

    1. Personal use, then there’s nothing to do, ie
    • If it’s a PPOR the loan is non-tax deductable anyway
    • If it’s a IP the loan is still 100% tax deductable as the savings have not been contaminated within the offset account


    2. Investment purposes, then
    • If it’s a PPOR, then its best to draw the $100k savings from the offset to repay the loan down by $100k and then redraw the funds out of the loan to use to buy an IP (loan increases by $100k again) ie the redraw part of the loan $100k now becomes tax deductable for the next IP
    • If it’s a IP, then there’s nothing to do because you’ve already claimed 100% tax deductibility on the loan


    So it doesn’t matter if the PPOR becomes IP and then becomes PPOR again or vice versa, because by using an offset account for the surplus savings provides flexibility in what the ‘savings’ eventually get used for (personal = no tax deduction, investment = tax deduction).”

    Any comments would be much appreciated! Thanks! :D
     
  2. marg4000

    marg4000 Member

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    In a nutshell:

    An offset account stands alone. It's sole benefit is that, instead of receiving interest you "save" the equivalent interest on the loan it is attached to. (ensure the offset account is 100%, i.e., you save the same rate of interest as the loan). As this account has nothing to do with the loan, you can use the money however you want. Offsets can be attached to a PPOR or an IP. Clearly if you have a PPOR loan that is the best place for the offset to be.

    When you redraw you are adding an amount to your existing mortgage. Complications arise if it is a mortgage on an IP and the purpose of the redraw is for personal reasons. Or if the mortgage is on the PPOR which one day becomes an IP. Life has a funny way of altering plans, so don't think redraws are OK because it is your PPOR.

    Offsets are a truly great invention.
    Marg
     
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  3. ozmale42

    ozmale42 Member

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    You can say that again. These products weren't around 15 + years ago and are fantastic..

    They are also a good way to keep reserve cash yet still minimise interest charges.

    After my recent divorce I came out with enough cash to buy my PPOR but instead of using all my cash I simply paid 20% in cash, borrowed the rest and opened my offset account with the balance.

    My PPOR will some day soon be an IP so once I'm ready to go down that route I'll simply take the funds out of the offset to buy my new PPOR. (just waiting and seeing what the market's doing) or otherwise take 20% of the new PPOR out of teh offset and borrow the balance leaving the remainder cash in an offset attached to the new dwelling for emergencies
     
  4. Peter_Tersteeg

    Peter_Tersteeg Finance broker/strategist

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    A couple of simple rules:

    1. If you've got a non-deductable loan, put the offset account here instead of against a tax deductable loan.

    2. Income should be put into an offset account. This includes income from your job, rental income or dividends from shares (this assumes you own the property or shares, not a trust or company).

    3. Money borrowed should be stored in redraw where possible, otherwise put into an offset account against a loan with the same purpose for which the money was borrowed.

    4. Any loan account should be clearly tax deductable or not tax deductable. Not a mixture of both.


    Whilst puting money into an offset account is technically 'better' and 'more flexible' than paying down a non-deductable debt, it's not absolutely right for everyone. For some people, getting rid of the mortgage has merit.
     
  5. 7smurfs

    7smurfs Member

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    This topic of offset has really intrigued me and I've been trying to understand this also

    Can anyone confirm if this is the case in my scenario of:

    A $400K mortgage on a PPOR that I plan to turn into a IP after 6 months + $100K in an offset account leaves the benefit of the same amount of interest payable as a $300K mortgage.

    So it would better to borrow the entirety (100%) of $400k and put your $100k saving into an offset account, rather than putting it down as a deposit for the house/apartment?
     
  6. The Y-man

    The Y-man Member

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    Theoretically yes - but in practice LMI costs come in.

    The Y-man
     
  7. Peter_Tersteeg

    Peter_Tersteeg Finance broker/strategist

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    I assume that you're already putting down a minimum deposit for the property and the extra $100k is surplus funds?

    If you're planning on making this property an IP in 6 months, definitely borrow extra and put surplus funds in an offset account. Exactly how much you borrow will depend on your borrowing capacity and if you're willing to pay mortgage insurance or not.

    This structure will give you the flexibility to still have access to the $100k in the future for non tax deductable uses (such as buying another PPOR), without comprimising the tax deductability of the loan on the first property.
     
  8. BMan

    BMan learner property investor

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    h@pbp
    you basically have it right

    correct

    if its a PPOR
    IMO instead of drawing the whole 100k down and paying off i would only draw out and pay off the required amount for a 90% lend on the new property

    If it’s a IP
    correct if you have equity available to purchase the next propertybut
    id still do the same as if its a PPOR if you required equity for the next purchase rather than paying cash for the deposit

    it doesnt matter with the offest side of things but CGT if you sell will matter depending how you switch them around but thats another story

    also as you would probably understand but for anyone that doesnt put all your excess funds into the offset for the current PPOR instead of the IP as its non tax deductible
     
  9. Terryw

    Terryw Investor

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    Hi H

    I think that is a good little summary.

    I would just add that the offset account should be on the private debt if you have any - as per PT.
     
  10. Rolf Latham

    Rolf Latham Member

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    • Id add

      put a separate IO loan split into the PPPOR loan when redrawing the 100 k.

      Ie 200 k PPOR loan. Repay 100 k, reduce 200 k limit to 100, add a NEW loan split for 100 k, pull funds from new loan for investment purposes

      ta
      rolf
     
  11. Rolf Latham

    Rolf Latham Member

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    Hi 7

    WHat you can do with many lenders is have the 100 k cash in a Term deposit and you provide that TD for supplemental security..........100 % lend

    BUT obviously the rtn on the TD will be weeny and taxable.

    Useful where you know that in say 6 mths you can release the TD security, as in value adds ie reno, subdiv etc

    ta
    rolf
     
  12. fbc10

    fbc10 Member

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    So what strategies do people use with this offset account? By reducing your monthly interest you increase your cashflow. Is this surplus used to pay down the loan?

    Also my understanding is that the benefits are not as great on a fixed interest loan. I believe comm bank reduce your interest rate by approx 2% on the offset portion of your loan.

    Is there a way to pay P&I and also have a 100% offset account?
     
  13. Rolf Latham

    Rolf Latham Member

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    Its not so much about the cashflow, since u can get a similar $ result with using a redraw. Offset gives you more options in terms of tax management should u ever rent the property out, or indeed if the property is an IP to start with

    QUOTE=fbc10;870204]
    Also my understanding is that the benefits are not as great on a fixed interest loan. I believe comm bank reduce your interest rate by approx 2% on the offset portion of your loan. [/QUOTE]

    thats correct. Though there are lenders that will do 100 % even on fixed

    Yes. With PI with most lenders the repayment stays the same ( so ur cashflow isnt affected) and your principal reduces.

    One obvious question............why use PI in the first place ?

    ta

    rolf
     
  14. fbc10

    fbc10 Member

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    Thanks Rolf.

    So if you are purely buying IP's (and for arguments sake their is no intention in the MT/LT to buy first PPOR) then their are limited tax benefits in the strategy of offset accounts?

    I currently use PI on one of my properties as my rental income covers PI repayments. LT view is to continue to pay down debt in order to reduce exposure/gain equity. Which is something Mcknight and Lomas both support in their books. Im assuming this is not a strategy you follow..?
     
  15. Aaron_C

    Aaron_C Finance Broker

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    If you are not comfortable with large debts and need P&I to be comfortable, then by all means do so. However, for the active property investor P&I is a straitjacket that restricts growth of your portfolio.
     
  16. 7smurfs

    7smurfs Member

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    Thanks Rofl. Didn't know TD's could be used as security, I currently do have the 100k in TD atm (paying ALOT of tax) so it should be an easy transition
     
  17. Rolf Latham

    Rolf Latham Member

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    if you are certain that you will NEVER make private ( non taxable) borrowings ever, then the primary benefits of IO with offset over PI and redraw are

    Redraw is always at the permission of the lender, offset is YOUR money
    The obvious convenience of cash in an offset account

    My primary comment is that if you have THAT sort of surety about your future outlook on NEVER having private borrowings, then you are blessed. Reality for most people is that good intentions and ideas run smack bang into a reality they may never have seen 6 mths out let alone 20 years out.



    Im dead against "absolutes" with any investment strategy that doesnt conider personal situations AND doesnt provide "wiggle room"

    the strategies we implement with our clients give you exposure reduction and equity gain in exactly the same way as PI, but without the attendant possible downsides.

    For some clients ( eg not great money managers, or investments with a fixed/defined exit strategy) PI can be a better option

    ta
    rolf
     
  18. BMan

    BMan learner property investor

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    it it that hard...?

    an offset, offsets the amount in the offset against the loan, which then make the loan think its balance is the amount minus the offset and charged accordingly

    eg.
    normal I/O loan 100k
    IR 6.5%
    repayments $6500

    normal I/O loan 100k
    10k in redraw
    loan amount based on 90k
    IR 6.5%
    repayments $5850


    Offset I/O loan 100k
    10k in offset (same as if in redraw)
    loan amount based on 90k
    IR 6.5%
    repayments $5850

    the offset allows what redraw cant
    -to do what you want, when you want with your money without fees or banks denying it
    -to removed the money and the loan is still 100% tax deductible
     
  19. h@pbp

    h@pbp Member

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    thanks ss followers for the prompt response... its great to have the support that you arent totally insane :D

    just to clarify, if there was equity available in the IP, it would be best to redraw the funds out and set up a new loan split IO..... but of course, if there is no equity, are you suggesting that its still good to repay and redraw out the funds?
    :confused:

    understand.

    so if for eg IP1 had excess equity via CG (not offset/ savings) and we redrew $100k equity to buy say IP2, and then IP1 became our PPOR, would the $100k still be tax deductable when IP1 becames PPOR?
     
  20. MikeF

    MikeF Finance Broker

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    Showing my age here...........Actually some lenders started offering offset accounts over 20 years ago (about 1990) but they generally weren't 100%, just partial offset.

    Might be wrong but the first interest offset account was introduced by National Mutual Rank Bank in about 1989 with this bank subsequently taken over by ANZ.