Offset account

Actually, i don't see it as being the same.

1) while i am living in it, i now have deductible debt if i invest that 25k. Considering most people will live in a PPOR for at least 5-8 years, that should be a considerable saving.

2) If i move out my total amount of borrowings would be deductable. If i had paid off 25k into the loan due to P&I repayments, that part would not be deductable unless you create a new mortgage, or have the ability to pull it out again via a LOC.

Did i miss your point?

 

I've been assuming all along (and probably should have stated it explicitly) that you can draw out any equity from your PPOR via a LOC. Why wouldn't this be the case? As far as I understand just because you have a P&I loan compared to IO+offset shouldn't make any difference to setting up a LOC (in fact I have a P&I PPOR loan and have a couple of LOCs set up as well)

For example, just say we both have a $100K loan on my PPOR. I set mine up as a P&I, and you have a IO+offset. We both have $20,000 per year to pay into our loan. Assuming 8% interest, at the end of the 1st year my loan balance will be $88K - I've paid in $20K, but 8K of that was interest payments. At the end of the 1st year your loan will still be $100K, but you will have $12K in an offset.

Now, we both want to invest our excess equity. I go to the bank and ask for a LOC to be set up, using the $12K of equity in my property, so I now have a $88K loan and a $12K LOC. You go to the bank and pay your $12K cash into the loan, and ask for a LOC of $12K to be set up using this equity. Snap, we're in exactly the same position.

John.

 

Mate we disagree.

In my business I see a lot of keen young couples who wish to buy a little place, pay it down with two incomes then upgrade it later when it is too small for a family.

Given that many starter places in Sydey are 1-2 bed apartments this is not uncommon.

If these people wish for this starter property to be their first IP then how on earth is maximising their equity in their PPOR redundant? Esp since a LOC imposes additional costs.

I don't wish to prolong any disagreement and happy to leave it alone - I do understand your viewpoint.

 

In the example you give then I agree 100% that an IO+offset is the best solution if they are going to turn their first property into an IP when they upgrade. I think I said this in an earlier post.

I guess you see a different demographic than me, and certainly a much larger sample. Of the people I know, both investors and non-investors, none of them plan to turn their PPOR into an IP in the short term. In this case if they wish to continue investing in a tax friendly way (ie. loan interest is deductible) then at some point they need to pay down their PPOR loan and redraw via an LOC - at least that's my understanding, correct me if I'm wrong. In this case whether they do this via a P&I loan or by taking cash out of an offset and paying off some loan principle as a lump sum the effect is the same. That's all I'm trying to say.

And I wouldn't say we're in disagreement if we can both agree that I'm right

John.

 

My situation is easy as i am putting in my money to back the amount of the LOC. Yours on the otherhand is based on the equity of the house, would that require a valuation on the property or new loan applications to be set up? I don't know i have not done it this way?

 

Borrowings

 

To avoid break fees, I'm thinking its best I wait till the 5 year fixed interest period is up. By then I would hope we would be in a new ppor. I would hope that loan would be IO + offset + redraw.

Is it right that you would use the offset money (if you had to) for non deductable purposes, and redraw only for investment purposes?

If the wife wanted to see progress in paying off the ppor loan, we would just have to look at the offset balance I take it (although I would probably want that money in a fund rather than in the offset)

Would you want IO+redraw+offset for all property loans, regardless whether its the ppor or an investment? I'm thinking the consensus is yes.

Which products can I look at (online) which have the above flexibility with low variable rates or fixed interest?

ING doesnt seem to offer the offset although there is one product with a LOC, I dont know if it also has redraw.

 

This is the ING account that might be worth looking at. Assuming that a break fee is not charged because we would be switching from another product from ING. Would the following do the job?

ACTION EQUITY LOAN

A loan that allows you to use the equity you have built up in your property as a line of credit.

Benefit: Use your equity to invest in another property, buy shares, take a holiday or simply do something you've always wanted to do. And if you're using your equity for income-producing investments, such as shares, the interest you pay on the money borrowed may be tax deductible. You can also pay your bills with available funds using BPAY®.

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Rate: Low variable interest rate

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Loan Term: Revolving term

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Repayments: Direct Debit and salary crediting

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Repayment Type/s: Interest Only

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Additional Repayments: Yes, any time and at no cost

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Redraw: Yes, no minimum amount

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Access: You can access your funds by cheque book, telephone, or internet transfer.

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Split your Loan: You can split your loan into two separate accounts to help manage your personal investment and business accounts.

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Ongoing Fees: No monthly account-keeping fees and 10 free withdrawals per month

 

Well, the LOC i am setting up right now! So i don't know the exact procedure yet, but i would imagine that it will have it's interest charge shown separately as it will be it's own account just like my offset is and that advises me how much interest i have saved by having money in it.

If not as it would be a fixed sum i.e 25k it would be a matter of simply calculating the interest manually (25k x int rate)/365 x days of loan in this financial year. This is obviously assuming the rate has not changed throughout the year.

 

Hi Sim,

I agree that's another example where having this this structure would pay off, and one that I hadn't thought of. I think my problem is that I find it hard to imagine the possibilities. For example, I can't imagine moving interstate for work, unless there was a depression, I was out of work, and my famiy was starving - I live where I am because I want to live here, not because there is a job to be had. But of course, If I think about it I realise that others (like yourself) are quite happy to move for work.

OK, so you're all right and I'm wrong . I guess in the end the IO+offset is probably the way to go since it is really no extra effort than having a P&I loan.

John.

 

I think to keep the accounting clean you would need to have a separate LOC set up, rather than a redraw facility. That is, if you pay a lump sum into the loan, you then go and set up a separate LOC for that amount and take the money from the LOC for investments. All the interest on the LOC will be deductible. This is what I do. Maybe that's what you meant.

This has been my point in my earlier posts. Unless you were planning to move out in the short term you would never have much money sitting in the offset, as it is not working for you. I keep enough in mine for a few months living expenses, but if it builds up much more than that it gets paid into the loan and taken back out via an LOC.

John.

 

Hey John,

Having money in your offset account is working for you. It is saving you paying interest on that amount. Sure it might only be 7-7.5% which you should be able to beat if you invested that money. But if you are risk averse and don't want to invest your excess cash further i.e. are reaching retirement, having a baby soon or are saving for something it is definitely better than having a P&I loan and either a) have it sitting in an account earning no interest or b) paying it into the loan and then having to setup up a LOC and dealing with a bank/broker.

 

Yeah who wants to deal with one of them

 

Ha Ha, but you know what i mean. One avenue requires no interaction with anyone once it is set up, the other one requires phone calls, emails, forms, tax returns yada yada.

 

Would you guys say that every loan should be IO+offset+redraw?

Would IO + redraw work ok, with perhaps only the ppor loan having an offset or LOC?

Does it make much difference whether its a line of credit or offset?

 

Im my situation the IO+Offset+LOC is only because it is my PPOR. For my next IP i would imagine i would only need IO (+LOC when equity build up in it) and no offset. I don't see why you would need another offset account.

 

Alrighty then, so for my current unit I really only need a redraw account then, and the next loan (for the ppor) should have the offset.

With the current loan, assuming its refinanced to withdraw equity (deposit for ppor), is the interest on the new loan amount for the unit 100% tax deductable? The intent of the loan is for the investment unit but the value of the loan would be 95% current market value rather than what we paid at time of purchase, the difference funding the ppor.

 

That was a confusing post. But what i think you were trying to say is, if you draw equity out of an investment property for the purposes of bying a PPOR is the interest on that extra equity deductible. I would say "no", as your intent is not for investment purposes but rather personal purposes.

Maybe i mistead your post though.