Hi Guys
I'm looking at different home loans for mum in relation to an investment property.
We have been advised to go with an offset account.
Is there a particular offset account that any ozbargainer can recommend?
-good interest rates
-no fees
for a loan that is over $200k
Thanks
oh ok, thats interesting. My advice was to get an offset account.
Reason is this:
you earn interest which decreases the loan
you get deductions for interest expense
interest earned is offset by tax deductions, you reduce your overall loan and you can still make extra repayments.
otherwise in a normal home loan, any extra repayments do not earn interest….
but I am no financial guru…
I agree with gevidian, Offset accounts are for your residence, not your investment.
Ideally, you want to keep your residential mortgage as low as possible and your investment as high as possible as you can claim the interest charged on the investment property, but not on your residential property.
As a result, investors tend to get Interest Only Loans, therefore they always pay the maximal amount of interest.
Offset accounts earn interest?
I'd double check that. The advice you got is good for a residential property, but you misunderstood what an offset account does.
In my experience the merely offset the principal - ie save you paying interest on that Principal, but the savings wont accumulate over time, that'd be double dipping on the bank, which a bank would never allow!
Also be aware that if you do make extra repayments into an investment property (including into an offset account), you cannot withdraw them and start to claim the interest charged on the amount you withdrew unless you use that money to make another investment.
It's complicated and it sucks… I got caught out misunderstanding that rule with my old property, that was previously my residence and is now an investment.
Your advise on the offset account is not correct. As posted below, ATO will not see using funds from an Offset Account as redraws.
Also, its not correct to state "investors tend to get Interest Only Loans, therefore they always pay the maximal amount of interest", where you are implying that investors MUST pay interest and the maximum possible, and that negative gearing is better than positive gearing. The truth is people are always better off not paying interest, and where you have to pay interest, you pay the minimum possible, not maximum!
Zenger, all responses here are much better than your accountant or financial adviser could possibly have given you:) and best of all are free or maybe we should send you a tax-deductible invoice too? lol.
Anyway…, I own my business, bought my second property almost 7 years ago and by October will have paid it off. I do have an offset account because it's a convenient access to a 'Loan' should I ever need it and the beauty of offset account is that the amount you withdraw incurs Identical Rate as per your home loan which as a rule of thumb is generally cheaper than Personal/Business Loan.
It boils down to a question what you need an offset account for based on your understanding of what offset account is (as pointed out by Scubacoles 2nd paragraph & Hatt's ), good luck.
Offset and extra payments reduce your loan which reduce the interest expense which you get deductions for. Less deductions means more tax on the rental income. Some people opt for interest only payments for a part of the loan (first five years, etc) to maximise the tax deductions. Again, advice is free and everyone has an opinion. You overall financial situation will determine what will work best for you. Good luck!!
I'm going to buck the trend here and say YES, an offset account attached to a investment loan would be a strategic move.
Assuming you do not have any personal (non-investment/deductible) debt then an offset account allows you to use your personal savings to reduce the interest paid on your investment WITHOUT actually paying a cent off.
For many people this is a particularly useful facility because it does not blur the line between investment and personal. If you were to use actually pay the investment debt down (additional payment etc) then you can never pull money back out for personal use. If you only have the funds in an offset account then you are free to do with those funds as you like.
The whole purpose of an offset account is that instead of getting paid interest you offset the interest you pay on a 'linked' loan 1:1 (even with personal debt alone this is advantageous due to the different in savings/loan rates) so 25k savings and a 100k loan means you only pay interest on 75k even though the balance is 100k.
Again, I have made the assumption there is no personal debt, if there is then most investors will pay it down in descending order by the rate of interest charged.
This is not advice. Talk to your accountant or pay for financial advice if you wish but your accountant will know more about the tax implications which is the guts of it here.
If you only have the funds in an offset account then you are free to do with those funds as you like.
and
so 25k savings and a 100k loan means you only pay interest on 75k even though the balance is 100k.
NOTE: as per my comment above that if you do withdraw from your offset, the tax office views this as taking a new loan.
ie should you withdraw that 25k to buy a car, you can only claim the interest on 75k, not on the 100k
If however, you withdrew the 25k to buy some shares, you could claim the interest on the full 100k, cause you have made another investment.
As such, if your Mum was planning to buy a car (or similar non-investment), she may be better off putting extra cash into a High Interest savings account.
As others have said, get some advice from someone who is qualified (not me), trusted, and knows your Mum's financial situation and her plans for the future.
I agree to err on the side of caution and get some tax advice if you are worried about the tax implications.
My CPA saw no problem with this when we last discussed it, yes it can be queried but I am of the understanding that as long as you can prove the loan amount has not changed then it will be fine, unlike if you paid some off and redrew it for personal use.
Have a look at http://www.propertyinvesting.com/forums if you want broaden your general knowledge but get your own advice, or better yet apply to the ATO for a personal ruling (only $20 or so I think) where you will be given a concrete answer with no uncertainty later on.
You are almost right there. If you pay extra off your home loan and then redraw it, the ATO views that as new borrowings. However if you have an offset account linked to your loan you can transact on that as you please provided you don't reduce the principal of the loan you will be fine.
The link to one of the ATO pages on this is here http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20002/NAT/…
It depends on what is better for your situation with regards to with or without an offset on an investment, ie are you better off paying off the loan quicker (so have an offset) or better off claiming more interest as a tax deduction (have no offset).
One should also remember that this is all icing on the cake. Buying a property below market price and getting above market rent on it is what would be ideal.
May be you have got this info somewhere in the thread, So excuse me for repeating if you already got it.
Mortgage Offset Account is attached to the home loan, you won't earn any interest as such but the benefit is it will offset the loan amount you owe and hence you will pay only what you actually owe to bank, so e.g. $100 loan and $40 in Offset account, You pay interest only on $60.
Get any 100% offset account, feature wise they all same, i.e. as long as its 100% offset it will offset loan amount by 100%, so in above case it will offset $40 and you pay interest only on $60.
Why people have 'em - Investor's get them because if you pay off loan and then redraw the money for some other use, Tax Office will not accept that and they won't let you claim deductions after you have paid off loan.
Say for example in above case, you can withdraw $40 from offset account and start claiming tax on the $100 again, but if you repay the $40 in loan and then make a withdrawal from loan Tax office will let you claim only on $60. So min. amount owning during the period.
Most people only use an offset account for their primary residence - the negative gearing benefits on an investment property do not really warrant the use of an offset account. You might want to get some sound financial advice on this.