Hi all,
Nowhere near the end of my home loan but running a hypothetical here. If the loan lets say is $500k and i've got $500k in the offset, obviously fully offset and no interest to pay. But what happens then? Do i just leave the facility open and pay the annual fee so that I have a $500k credit line until you build up enough of a savings buffer? And then what, pay off the account.
Thanks!
Wouldn't I just loan money for the investment, that way i reduce my non-deductibles, while being able to tax deduct the interest of my investment loan?
If you're planning to do that, don't take the money from your offset. You need to take the money as redraw from the home loan or as a line of credit and I would suggest you setup a loan split to separate your funds for investment from funds for private purposes.
This is assuming that the home loan originally was for your own home which is for private purposes and interest isn't deductible in first place
Thats what i meant sorry. Keeping your PPOR loan separate to your investment loans to keep your deductibility options
Wouldn't I just loan money for the investment
The point is that you can't get anywhere near as low as the rate you're getting on your home loan.
You have two choices … (1) leave it fully offset and pay the annual fee to use it as a line of credit, or (2) fully pay out the loan and discharge the mortgage. Please note that in the first instance you will still be paying your mortgage in line with your normal periodic payments so your LoC will slowly get smaller, but 100% of that payment will be principal so even though you are "paying" your mortgage, there is no interest being charged.
ta helpful answer thanks!
pay the annual fee
Is it substantial? If so, consider paying out the loan.
In my opinion there are 2 considerations in this sort of circumstances:
1. Even though you are in a fully offset position, the bank is still registering that you have a loan with them. It's just the interest would be zero. If someone hacks your account and stole your all your money (hypothetical), you would still owe them the full loan amount. If you pay them ALMOST all of them instead, they can't redraw your loan balance and steal your money (at least, not as easy to do) and your loss would be limited.
I am finding as my bank balance is closer to my loan balance, I am always tempted to pay it down to just $50k instead of leaving the big amount there.
Thats always what confuses me, because any money I take out of the offset would have to outperform 3.20% + my tax bracket? Makes investing in low risk things like ETFs kinda pointless in my eyes or am i thinking the wrong way.
Out perform home loan rate / (1- (tax rate/100)).
Say tax rate of 37% tax, 2% medicare levy without surcharge.
effective rate to outperform after brokerage/fees/cgt = 3.2 / (1 - (39/100)) = 5.246%
No you have to compare apples with apples. If you take money out of the offset and invest in ETFs, then the additional interest you are paying on your loan is 3.20% after tax(because the interest on your PPOR home loan is not tax deductible) and yes your returns from ETFs have to match/exceed that after tax figure to make financial sense because you're now having to pay that extra interest on your home loan in order to invest those funds in ETFs.
If you take the money from the offset, put it into the loan, then redraw the money out as a loan split to invest in ETFs(ie. Debt recycling), then the interest rate of 3.20% becomes tax deductible because you're using those funds to invest, so then your returns from ETFs just have to match/exceed that 3.2% figure BEFORE tax for you to come out ahead which makes it a lot more attractive.
Also, I wouldn't consider ETFs "low risk" in general. They're probably lower in risk than one specific stock because they're diversified over whole markets/sectors/asset classes, etc, but they are still risky.
Thanks didn't take into account the loan split.
I am not sure how this suggestion is any different than what has been said before.
If you take money out from offset and invest in something, unless that investment yields more after tax than the interest rate being offset (also after tax), then better to leave in offset.
Also you do not have to do split loan in order to make an interest deductible. As long as you can substantiate the use of offset redraw (or use of withdrawn fund from offset account) for investment, it is sufficient documentation. However the use of split loan is kinda easier to manage for taxation purposes but in my view, not compulsory for deductibility.
@burningrage: You can't just withdraw money from an offset account, invest in some investment asset like shares, and then the additional interest resulting from withdrawing from the offset becomes tax deductible. I'm not sure if I'm reading you right but it seems like you're treating a withdrawal from an offset the same as withdrawing using redraw when they're actually treated completely different tax-wise.
Here's a relevant ruling with regards to the offset vs redraw:
https://www.ato.gov.au/law/view/view.htm?docid=EV/1051179013…
I'm just pointing out to the OP that depending on how he structures how he withdraws the money from the loan to invest in shares, it substantially impacts how much the ETFs have to return in order for it to make financial sense. One way, the interest charged on the home loan is tax deductible, another way, the interest charged on the home loan isn't. Numbers-wise, using Arkie's example of 39% tax rate and a 3.2% home loan interest rate:
1) withdraw from offset and invest directly in ETFs, the cost of the money used to invest is effectively 5.246% before tax because the interest charged is not tax-deductible as its assessed as just additional interest on the original purpose of the loan, which for a PPOR is for private purposes. So the ETF has to return at least 5.246% before tax before the investor breaks even on his investment.
2) withdraw from offset, put it into home loan, split loan into appropriate amount, and withdraw from that loan split which will be used purely for investment purposes, and then use that money to invest in the same ETF, As the interest charged is now tax-deductible(because the purpose of the loan is for the investment), the ETF only has to return 3.2% before tax before the investor breaks even on the investment.
That 2% difference(5.246% vs 3.2%) is a substantial difference between an investment making sense or not from a financial perspective
With regards to the loan split, if you don't split the loan, it's a very good way to contaminate the loan and for the ATO to rule it as a mixed-purpose loan and deny you any deductions available to you as a result if the deductible portion isn't tracked sufficiently. And unfortunately, when it comes to tax matters, the only view that matters is the ATO's. You can apportion out the tax-deductible portion of a mixed-purpose loan using ATO-approved methods but the calculations can get quite onerous quickly.
@Kenb0: @Kenb0
I see. So the tax law does not consider an offset withdrawal as a loan as the balance is in credit. Since there is no loan, there is no interest to be incurred and thus, no deduction to be allowed.
There you go OP. Thank you for the explanation.
@burningrage: You're welcome. As someone whose father got done by the ATO because his accountant incorrectly advised him that redraws and offsets were treated identically by ATO, and he had to pay back interest and penalties after an audit, unfortunately I'm all too familiar with the differences.
Much rather others understand the differences and not have to go through that pain
Doing this now. As said above. Essentially a 0% interest loan + fees. In my case it's $8 a month.
As you are probably doing…it allows you to reduce all debt on the loan while having the money available on call as you need it….and given the interest rates atm…you'd be saving more by offsetting than earning in an easy to access at call savings acct.
what about your excess then? the way I picture it, have loan 100% offset and any extra start investing with it?
Yup. just like anything. Use as you wish. New investment, discretionary spending etc.
I did this once and the bank reduced the mortgage payments to 35 dollars a week. Didn’t quite understand this, maybe it would have slowly gone up ahain
Should one feel bad buying a house with a 20 percent deposit, then offsetting from day 1 100 percent, would a bank get pissed off. Should one act as if they only have twenty percent.
The other side of the fence, hypnotically if you could repay your loan out with offset funds; that would mean you would discharge your house title from the bank. Previously the bank held onto the title of the house. Now since its discharged, where will you put it?
Personally I feel a lot safer knowing that bank holds the property title. The bank has a vested interest to maintain safe keeping of it, to recall their loan if ever required.
I'm hypnotised already
That's incorrect. Repaying a homeloan doesn't mean they will immediately return the physical title. There is a discharge fee to pay (of course - it's a bank) and also govt charges to remove the mortgage. If you don't pay that fee and sign for the title, they cannot return it and will hold it…
Disadvantage of this is that the bank fees will likely go up over time and the state govt charges are indexed for CPI annually.
Paper titles are obsolete. It's electronic now.
Once you have enough offset against your loan that it nets to zero , you can redraw the offset and apply it to my offset account on my loan. that way, you have paid off two loans.
Everyone's a winner!
Yes, would basically be an open line of credit if you don't pay it off. That said, don't keep $500k in an offset account, a loan against your home is one of the cheapest forms of debt you'll ever get. Put the money into a fund, ETF or the like so that you can leverage your returns whilst you still have the loan. Or use it as a deposit for another property…etc.