When to use offset and redraw?

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:
this is what id do but might not be correct or suit you

ill simplify it
1) if theres no equity, pay the bare minimum (out of the offset) to create the equity needed to then redraw for a deposit for the next property if its an IP

2) if your purchasing a PPOR then you might want to just use the cash BUT
if your planning on renting the PPOR out a year or 2 down the track it still may be better to do option 1




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 deductible when IP1 becomes PPOR?
yes, as its been used for an income producing asset

hypothetically
if IP 1 was actually PPOR you could do it and the 100k would still be tax deductible

anyone with equity sitting in there PPOR in effect has "Lazy Dollars" i think its called
 
Thanks BMan. Understand everything else but just the part below...

this is what id do but might not be correct or suit you
ill simplify it
1) if theres no equity, pay the bare minimum (out of the offset) to create the equity needed to then redraw for a deposit for the next property if its an IP

if theres no equity in the loan (because its IO and no principal has been paid down since start of the loan), how does using funds from the offset create that equity for redraw?

sorry think im having a blonde moment :eek: its okay im blonde so i can say that :D
 
if theres no equity in the loan (because its IO and no principal has been paid down since start of the loan), how does using funds from the offset create that equity for redraw?

sorry think im having a blonde moment :eek: its okay im blonde so i can say that :D

you pay some funds from the offset into the actual loan
say you have 100k in offset and no equity in a 200k loan @ 80% LVR
and upon a revaluation the price hasnt moved so its still 200k so no gained equity that way
you pay off what you require to use as a deposit + fees etc (say 30k) from the offset into the actual loan
the offset now has 70k and the loan is now 170k with 30k available for redraw
you then redraw that for a deposit for the next house and its all tax deductible again
 
the offset now has 70k and the loan is now 170k with 30k available for redraw
you then redraw that for a deposit for the next house and its all tax deductible again

thanks BMan that makes sense on a PPOR loan....

but it wouldnt apply to IP property/loan because the whole loan $200k was already tax deductable to begin with and thus paying this loan down and then redrawing will just mean its tax deductable for another loan (ie tax deduction on loan 1/IP1 of $170k and tax deduction on loan 2/IP2 of $30k)??? :confused:
 
its no real benefit to do it like that for an ip

the only benefit would be is if you wanted 2 turn your IP you currently have into a ppor
otherwiase just use the cash, especially if you want to turn the new IP into a a ppor
 
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

So suppose one day we turn one of the IP to become PPOR what should be done to the Offset account in terms of taxation ?
 
Thanks ss! Makes more sense...

And now our structure is in place & equity just released :)

The question is where to buy +CF IP < $350k in Australia?! :confused:

Do they exist?!
 
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.

Just to clarify things a tad, an offset acct attached to a PPOR loan MUST in my understanding have a seperate loan acct. no. and DEFINITELY not share the same acct. no. as the personal loan. Most banks will do this when requested.
 
Just to clarify things a tad, an offset acct attached to a PPOR loan MUST in my understanding have a seperate loan acct. no. and DEFINITELY not share the same acct. no. as the personal loan. Most banks will do this when requested.

Hiya

Most lenders offset is actually an offset acct with a totally diff acct number and bsb

Some lenders like CBA use the same account number but use a separate BSB number.

Then there are some non banks that use a more complicated version of the above, where they have a debit and credit account, which looks like it should still work tax purposes.

Its just important that the funds from one are never mixed with the other

ta

rolf
 
Just to clarify things a tad, an offset acct attached to a PPOR loan MUST in my understanding have a seperate loan acct. no. and DEFINITELY not share the same acct. no. as the personal loan. Most banks will do this when requested.

If it didn't have a separate account number then it wouldn't be an offset - it would be a redraw which has totally different implications.
 
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

I am reviving an old thread here sorry but I have been thinking about offsets etc lately and I am confused by this post. I thought that by having an offset account the repayments themselves wouldn't change but the interest charged would be reduced therefore the loan amount would decrease (in this example by the difference between $6500 and $5850 ie $650). This is based on our own experience with our PPOR loan & offset - we make the same repayments every fortnight, but the loan itself decreases by the difference between the repayment and the reduced interest charge.

But then, our PPOR loan is a P&I loan so maybe it is different for IO loans? :confused:
 
But then, our PPOR loan is a P&I loan so maybe it is different for IO loans? :confused:

Yes this is the exact reason why you think differently. P&I loans have fixed repayments no matter what the principal is, whereas IO loans have varying repayments depending how much interest has accrued.
 
Yes this is the exact reason why you think differently. P&I loans have fixed repayments no matter what the principal is, whereas IO loans have varying repayments depending how much interest has accrued.

Thanks Aaron. I have only recently begun to understand why you would want an IO loan - previously I was in the camp of 'must pay down debt asap in order to feel secure!!!' :)
 
Yes this is the exact reason why you think differently. P&I loans have fixed repayments no matter what the principal is, whereas IO loans have varying repayments depending how much interest has accrued.

Aaron, so does this means that even if the money in the offset account is more than the loan amount / owing, the interest debit is still continue not getting lesser.
 
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