Join our investing community

Offset account and investment property

Discussion in 'Real Estate' started by Ashcute26, 9th Jul, 2009.

  1. Ashcute26

    Ashcute26 New Member

    Joined:
    9th Jul, 2009
    Posts:
    2
    Location:
    sydney , NSW
    Hi ,

    I am planning to buy first home and down the line in 1 yr. I am planning to buy an investment property.
    I have an understanding of an offset account,but I am wondering,

    1) Should I take facility of an offset account? (It will cost me $30 more per month)
    2)Will offset account would help me in buying an investment property? and How?

    All I need to know is having an offset account NOW would help in buying of 1st investment property after 1 yr.

    Thanks in advance for your replies.

    Amod
     
  2. C3PO

    C3PO Well-Known Member

    Joined:
    28th Feb, 2008
    Posts:
    102
    Location:
    Adelaide, SA
    Hi Amod & welcome to the forums

    Having an offset account is a very good idea. However, in my opinion it's a better idea with regard to your home mortgage than it is for the IP.

    For each property Iwould suggest that you have two separate mortgages, standard variable for the PPOR with an offset account. Consider fixing the rate if you feel that rates may go up in the nearer term (but remember 99% of lenders won't let you have an offset account with a fixed rate mortgage, only standard variable).

    The interest that you pay on the mortgage taken out for your IP will be tax deductible. The interest paid on the mortgage for your PPOR is not. So when you have excess cash you will want to put it in the offset account that is linked to the PPOR.

    There isn't any point in having the offset unless you have cash to put in it. So my recommendation would be that you only do the offset for the PPOR mortgage initally. When you have equal cash in the PPOR offset account to the size of the loan, then maybe it's time to open up an offset account for the IP (or you might consider investing in something else when you get to that stage)
     
  3. Ashcute26

    Ashcute26 New Member

    Joined:
    9th Jul, 2009
    Posts:
    2
    Location:
    sydney , NSW
    Still having doubt

    Thanks for your reply,

    I am wondering if I can get facility of free extra payment and redraw from my PPOR martgage I could deposite extra cash even my salary into mortagage and could save interest ?

    For example: If my mortgage is 300,000 and I have extra cash of 10,000 I can simply deposite into mortgage account and will be paying interest on 290,000 only and can redraw any time .

    Then my question is then what is need of an offset account when it serves same purpose.

    Also I don't think I'll have cash sitting equals to mortgage amt in my offset account. I may go for next IP as soon as accumulate 10% deposit in an offset account for property.

    Thanks and kindly waiting for your guidance.
    Amod
     
  4. dudek

    dudek Well-Known Member

    Joined:
    10th Sep, 2008
    Posts:
    199
    Location:
    Sydney
    Hi,

    You may perhaps want to look at St. George Portfolio account. Don’t need to sign in but have a look how it works. It may give you some ideas depending on your personal circumstances.
     
  5. C3PO

    C3PO Well-Known Member

    Joined:
    28th Feb, 2008
    Posts:
    102
    Location:
    Adelaide, SA
    It's a good question because on the face of it, the offset account seems to serve no purpose. But the offset account is in fact very useful:

    - If you pay your additional cash (like $10,000 in your example) direct into the mortgage loan account, you will be charged fees to redraw it.

    - If you redraw it for investment purposes you may well lose the ability to get tax deductions on the borrowed amount for investment, since your PPOR loan is not tax deductible. Since the original intent of that loan was to buy your PPOR, the ATO will not allow you to tax deduct interest paid on a redraw. And you can't easily separate it from the PPOR loan anyway in terms of account keeping records.

    The St George Portfolio A/C (and NAB have a similar one) might be suitable for your purpose, but to be honest with you so would a standard variable home loan with an offset account, and this latter would be what I would do - naturally you should get your own professional advice
     
  6. nitro-nige

    nitro-nige Well-Known Member

    Joined:
    8th Mar, 2007
    Posts:
    49
    Location:
    Reservoir, Melb
    The loan on my PPOR is with members equity.
    We get free draws (there is a minimum amount). So we are saving our money into the mortgage and making a manual withdraw when we need the money.
    An offset account with members equity has a higher interest rate.

    Ideally I'd run a manual offset system (direct credit salary into the loan and live off the credit cars. Then pay the credit card bill using a redraw), But my better half isn't comfortable with that.

    Down the line we are looking to pull funds out of our mortgage using the redraw as a deposit for investment purposes. Tax wise it doesn't work in our favour but we save on interest payments in the mean time. Which will probably be a bigger gain.... will have to wait and see.
     
  7. JudgeDreadz

    JudgeDreadz Well-Known Member

    Joined:
    25th Mar, 2009
    Posts:
    109
    Location:
    Sydney
    Slightly off-topic here, but could someone direct me to a place where the difference between an offset account and a redraw facility is spelled out?
     
  8. Riri

    Riri New Member

    Joined:
    27th Aug, 2008
    Posts:
    2
    Location:
    WA
    I think the main difference between the two accounts is that the offset is linked account, as in your cash sits in another account separate to your mortgage account but the bank treats the overall as one.

    Redraw is not an account, but a facility where you access extra money you have in your mortgage.

    They both give you access to your extra cash but the main difference is as pointed out by C3PO, the tax treatment.

    I think it works like this. For a $300k mortgage if you put in 10k to an offset account and then take the money out there is no change in your loan amount as it is linked.

    If you put in 10k into the mortgage account and then redraw, your loan amount changes.

    Now if this is an investment property, I believe that by putting the money in and then redraw, you have effectively paid off your mortgage down to $290k (in the eyes of the ATO) even though you still owe $300k on it. So you can only claim interest on the $290k, not the $300k.

    It comes back to the purpose of the money that you borrow for.

    I believe that the offset account is better because you still get access to your money, while preserving your loan amount at the maximum.

    I think most banks offer a free offset account, just ask them.

    Hope that helps
     
  9. C3PO

    C3PO Well-Known Member

    Joined:
    28th Feb, 2008
    Posts:
    102
    Location:
    Adelaide, SA
    Offset Account works as follows:

    Mortgage amount : $300,000
    Principal repaid : $0
    Offset account balance: $200,000

    Interest is paid on only $100,000 because the amount in the offset account "Offsets" the mortgage, without having to repay the principal.

    In the case of the offset account, if you needed $50,000 for a new investment you would just draw it from the offset account where it is sitting waiting for you as cash.

    >>>

    Now if you repay the principal (i.e. no offset account), then a redraw facility works as follows:

    Mortgage amount: $300,000
    Principal repaid: $200,000
    Nett mortgage amount: $100,000

    Let's say you then decide to redraw $50,000 of the amount repaid for a new investment, then the nett mortgage amount increases back to $150,000.
     
  10. JudgeDreadz

    JudgeDreadz Well-Known Member

    Joined:
    25th Mar, 2009
    Posts:
    109
    Location:
    Sydney
    so what I am hearing is that with an offset account, your cash sits in an account just like cash. however, it simultaneously offsets the balance on which you pay interest as if you had paid it back. there is no fuss, because the amount in your offset account was never actually "in" your principal in the first place.

    whereas with redraw, you are actually pulling the money out of your loan which is why it is not as liquid and easily accessible.
     
  11. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,623
    Location:
    Sydney, Australia
    It's not so much that it is not as liquid - many redraw facilities work just like a normal bank account, some even have debit/ATM cards attached so you can access your money instantly.

    The problem comes when you go to use some of that redrawn (re-borrowed!) money for investment purposes - the question about how much of the interest is tax deductible as a result is complex and potentially costly for you.

    Redraw facilities are easy and convenient - but they have tax gotchas which you may not be considering up front, but which may come back to haunt you in the future.
     
  12. GregR

    GregR Reid Consultants

    Joined:
    13th Jul, 2009
    Posts:
    273
    Location:
    Berwick Vic
    Redraw & Offset

    It depends on the lender and you need to do research. Some redraws are free, others involve a charge. Some offsets work very well like a normal bank transaction account and you can salary debit, use cards etc. Some are very painful to use, not saying which bank. Not all offsets are 100% offset nor do all offsets work to reduce the loan payment, some just alter the split between the principal and interest component.

    For most home owners, using a fully functioning offset where salary is debited etc can work to reduce the home loan. For investors, you may consider directing rental income into the offset to further reduce the home loan as long as you had set your finance structures up correctly in the first place.