Hi all,
I am seeking opinions on my mortgage situation.
I have a fixed rate mortgage at 2.69% with an available redraw thanks to overpayment of the mortgage.
My savings account is paying an interest rate of 5.1%
Am I better off redrawing this amount and putting the money into that savings account? (I will not be touching the money, it will eventually feed back into the mortgage)
Thank you
Yes
So his effective interest earning is probably 3.2% (assuming he pays 37% of tax on average)
still better than 2.69%
he pays 37% of tax
Most OzBargainers would be 45% plus 2% Medicare levy…
So you are suggesting most OBers are earning over $190,000 pa ?
Dream on !
The way everyone here celetrates a saving of a few cents and others claiming they only have a few dollars in their bank account, thats highly unlikely.
More like a small minority
Anyone earning over $190K have more important things to do than looking for baragins and ready sulk stories on OB.
So you are suggesting most OBers are earning over $190,000 pa ?
Are you suggesting they’re not?
The after tax margin is greater than ~0.5%, see my comment below.
I have a fixed rate mortgage at 2.69% with an available redraw thanks to overpayment of the mortgage.
My savings account is paying an interest rate of 5.1%
Am I better off redrawing this amount and putting the money into that savings account?
What is your tax bracket for new earnings? As you'll have to pay tax on that 5.1% money.
Am I better off redrawing this amount and putting the money into that savings account?
Would depend on your marginal tax rate.
No it doesn't, they would be better off even under the 47% bracket
If anything it depends on if the property is owner occupied or investment.
they would be better off even under the 47% bracket
2.70% vs 2.69%…
Big deal !!!!
The question is if they would be better off, not if it is worth it.
No it doesn't, they would be better off even under the 47% bracket
LOL certainly not worth the hassle if they are in that bracket.
My savings account is paying an interest rate of 5.1%
ING 5.5%
Thanks - I'm with Ubank and shift my money out of the savings account to pay the mortgage, though
Yes, you could make a profit on the margin.
You pay tax on the savings account, however the interest (2.69%) is also tax deductible.
The tax deductible % of the 'investment' loan gets messy over time as you make non-deductible loan repayments.
Even if the withdrawal feeds back into the investment loan? (I'm not using the money for another purpose)
Is the existing mortgage for a PPOR or investment property?
Investment Property
@JimB: Thank you - So withdrawing the available funds will yield a (very slightly) higher IR deduction, offset by a higher interest income.
I wanted to sense check this in case there was something I was missing here.
@DV0993: redraw from an investment loan is considered "new borrowings" and interest on redrawn amount is not tax deductible. This is why most investors use offset accounts instead of loan redraw.
It is not advisable to redraw from an investment loan.
@Jake D: Exactly. ATO looks at the purpose of the funds redrawn when determining whether interest is tax deductible or not. Drawing funds back to park them in a savings account means that portion of the loan will not be tax deductible.
@miwahni: Whats the difference between parking re-drawn funds in a high interest savings account and investing them into shares?
The purpose of the drawn back funds is to generate taxable income. The expectation of a return on shares is sufficient. The actual interest earned on a high interest savings account is even stronger.
In both cases above, the link between the interest being incurred on borrowed funds and the use of those funds is income generation.
Define:
- $ Available = Amount you can redraw
- % Benefit = (Interest Rate on Savings - Interest Rate on Mortgage) * (100% - Marginal Rate of Tax)
- # Days = No of Days you have until end of fixed loan period
$ Benefit = $ Available x % Benefit x # Days / 365
Eg. $100,000 for 12months
$100,000 x 1.2273% * 730/365 = $2,454.60 after tax better off by redrawing $100k for 2 years and putting into savings at 5.1% and paying 2.69% ona top margin tax rate.
% Benefit = (Interest Rate on Savings - Interest Rate on Mortgage) * (100% - Marginal Rate of Tax)
That would imply OP pays tax on mortgage interest. That’s unlikely. This formula is still wrong if mortgage interest is tax deductible.
This formula is only right if you compare two saving accounts
If its redrawn off the mortgage, i'd argue its deductible.
Source of funds = home loan
Use of funds = income generation
Passes the sniff test for me.
Yes it's worth it, even if you're in the highest tax bracket.
Also you could put the extra income into your Super and so only pay 15% tax, even better then.
High interest savings accounts are variable rate.
There is no guarantee you will continue to make the current rate over the life of the move and we all know when the RBA cuts the first thing banks do is cut savings rates.
Tax implications aren’t the only thing to consider with this plan
You can change your plan in 20 minutes by moving your funds around, you are not stuck with the decision.
Yeah that’s an option but a annother option is to limit interest rate risk associated with variable rates by opting for a fixed rate product that expires near the end of the mortgage.
Redraw isn't real money, it's just a readily accessible line of credit. If you move it to your savings account, you're effectively borrrowing money with a view to earning a higher return than the interest you're paying on the loan. Your potential yield will depend on how much time you have left on your honeymoon rate.
You would pay tax on the interest earned from your savings accounts right?