Hi all, just want to see what everyone thinks about this one.
My current home loan investment rate is 4.69% variable with offset, and the current saving account interest rate is around 4.55%~4.75%
If I have about 100k savings, would you guys suggest putting it in the redraw or a high interest rate account? Considering my incomne this year will be roughly less <70k
I am aware of the tax implications with the saving account but knowing my income won't be much will it not be worth it?
I'm confused that you're aware of the tax implications but haven't done the sums yourself.
The applicable marginal tax rate is 32.5% plus the 2% Medicare levy, so you would be left with 2.98% to 3.11% after tax if you put the funds in a savings account, vs. 4.69% saved in mortgage interest by putting it in your offset account.
Edit: I've just noticed that you said "home loan investment rate". Is that a typo for "home loan interest rate", or is your home loan for an investment property and the interest is tax deductible?
Yes the interest is tax deductable!
So if I pay less interest I also end up paying more tax
Yeah, that does change the situation. In that case, the benefit of your offset account is also reduced by your tax rate, so I think you'd end up with more money in your pocket by investing it at 4.75% vs. putting it in the offset account at 4.69%. That said, it seems only BOQ is offering that much, and only up to $50k for under 35s.
I had an even more complicated connundrum than the OP.
I had 2 properties, one that I lived in and one Investment property which was negatively geared.
The PPOR was on a variable rate with offset and Investment property was on low fixed rate of 2.79% with 2 years still left to go.
I sold my PPOR few months ago and moved in to a Rental in different suburb.
Now the connundrum was ……………..Do I leave the fixed rate loan as it was and then put the PPOR sale proceeds in to a Term deposit or do I break the fixed rate loan and use an Offset account?
I finally decided to go with an offset because I felt that after all calculations there is not much of a difference in terms of money but offset was much less hassle and I could just keep putting my monthly savings in offset.
But I still have second thoughts as the variable interest on my investment loan is going higher and higher……..
oh well!
Yes it does, I just did a rough calc and it seems like offset is still the winner, not but much just slightly
Guess Ill keep it in the offset for now then
Cheers ragrum
do you also need to consider that you paying down the loan faster as a result of the offset? Not sure how to calculate this but it may have an impact?
@911r: It works out to be the same compounding effect in both the loan and the savings account. In the loan you're saving interest on saved interest, and in the savings account you're earning interest on earned interest.
An example with simple values:
Put $1000 into an offset account for a loan with 12% interest and monthly payments. In the first month you'll save $10 in interest, so your regular repayments will pay an extra $10 off the principal of your loan. In the second month you're saving $10 in interest due to the $1000 in your offset account, and also saving 10c due to the $10 reduction in principal from the prior month, for a total saving for the month of $10.10 and so on for subsequent months.
Similarly, put $1000 into a savings account with 12% interest paid monthly. In the first month you'll earn $10 interest, which you can add to your account balance. In the second month you'll have $1010 in your account, so you'll earn $10.10, and so on for subsequent months (the same amount as the offset account).
Offset
offset, saving money on interest is better then earning that 4.55% and then pay tax on it
Not to mention mortgage will always be higher than cash rate.
You should've set up a poll, would make it easier to understand responses and I would've voted for offset.
THERE's NO better investment than to pay of your loan (GUARTNEED RETURN). Wish I was told this before I invested my first cent.
I feel the op should hand in their ozb membership, can’t do basic maths….
You can only have the luxury of choosing between offset and high interest savings at the moment because of continuing rate rise but those benefits of savings account will be very short-lived due to rate rise. But over longer term offset will always win. Unless you want scratch your head every month to pick what bank to send your money too (it will be bank A offering higher rate than offset this month but Bank B next month and so on until the RBA call for a stop in rate rises) just put them all in offset.
offset - tax free work out around 6% pre-tax
Offset