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Offset account or pay more off mortgage?

Discussion in 'Real Estate' started by Crusher, 3rd Jan, 2010.

  1. Crusher

    Crusher Well-Known Member

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    Location:
    Newcastle, NSW
    Since i'm looking at my first home loan, i've come across offset accounts and was wondering if many people have dealt with these.. I understand the concept of how they work - I also, havent done any calculations, but was wondering whats a better option..

    $280-300k loan / repayments say - $420.

    i) Paying $450 or so a week or the loan, and putting a few hundred into an offset account

    or

    ii) paying 6-700 a week off the loan?

    Does it work out any differently in regards to how much comes off the principle?

    I think i'm going to be looking towards the offset account, rather then savings for holidays in a savings account making 5% or so.. Would be better to get 6%+ in the offset, right?

    What would you recommend a balance in the offset to make it worth while? say, 10k? 20k?
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Offset accounts are great.

    Have all of your income paid into the offset account and have your credit cards paid off from that account ... leave the maximum amount you can in there at all times - all surplus cash should be in the offset account.

    Offset accounts achieve the same as paying money directly into the loan - but gives you more flexibility.
     
  3. Billv

    Billv Getting there

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    The balance should be all of your non invested savings
     
  4. jrc77

    jrc77 Well-Known Member

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    Crusher,

    Also, if at any point in the future you think you might like to buy a new PPOR and convert this first house purchase into a IP then make sure you use an offset account (rather than making extra repayments and then redrawing).

    This will allow you to take money out of the offset account for the new PPOR (5 years down the track say) and then the purpose of the original loan is maintained as the first house purchase. The interest on this loan becomes tax deductable when you convert it to an IP.

    Regards,

    Jason
     
  5. Crusher

    Crusher Well-Known Member

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    I think i will opt for the offset account. The flexibility is what i want :)
     
  6. JudgeDreadz

    JudgeDreadz Well-Known Member

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    don't forget that most lenders charge a fee for the privilege of having an offset account whereas it is becoming more common for lenders to let you have a redraw facility with unlimited redraws free of charge.

    i would go the redraw if it is just a simple PPOR loan.
     
  7. Crusher

    Crusher Well-Known Member

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    The redraw facility does sound interesting also - i would have to compare interest rates for the two however and see what was best. At the moment i think i'll be opting for the offset, just to have all of my money debited into the account and draw out as needed (bills, etc)
     
  8. ashwright

    ashwright Well-Known Member

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    Don't use a redraw if you think you will _ever_ want to move out of the current place and turn it into a rental. If you use a redraw to take out money to buy a new place (and turn the existing place into a rental) the money used is not tax deductible. If you use a offset account to take the money from, then it is tax deductible. The ATO treats redraws (as new loans) and offset accounts (as a saving account) differently, and they have different tax treatments.

    I have simplified this a bit, but just trying to get the point made above across.
     
  9. Crusher

    Crusher Well-Known Member

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    Definitely the offset account, as i have intentions of making this first house into an IP. Thanks for your help.