An offset account is a transaction account linked to your home loan which have similar interest reduction benefits as a redraw facility.
Imagine you have a $500k home loan at 5% with $50k sitting in your 100% offset account, the interest payable will only be calculated based on $450k. You will save approximately $142,180 in interest and paid off your home loan 4 years earlier as more portion of your repayments go towards reducing the principal amount.
Below are two examples on how an offset account will benefit property investors from a tax perspective.
1. Avoid diluting the tax deductible interest
Say you have purchased an investment property and took out a loan of $700k, the interest will be fully tax deductible. You have received a $100k inheritance and wish to put towards your mortgage which leaves a balance of $600k. Later on you decided to go on a holiday and withdrew $50k from the redraw facility of your mortgage and the balance goes back up to $650k.
Because the $50k was used for personal reason, you will now only be able to claim tax deduction on the interest paid based on $600k instead of $650k, which isn’t ideal. There will also be an accounting nightmare to work out the portion of tax deductible and non tax deductible interest of your repayments.
This could have been avoided if your mortgage is linked to an offset account where you could park the $100k there and withdraw $50k for personal use without diluting the tax deductible interest portion because with an offset account, deposits and withdrawals can be made without the purpose of the loan being affected.
2.Turning your home into an investment property
You would want a higher new investment loan (former home) where the interest is now tax deductible and a smaller loan on your new home where the interest are not deductible.
Picture that your new investment loan balance is $500k with $200k sitting in the offset account. $200k could be use towards a deposit for your new home and you will now be able to claim tax on the interest paid based on $500k loan. In contrast if the $200k was paid into the mortgage and withdrew under a redraw facility, you could only claim tax on the balance $300k because the $200k was withdrew for personal use to fund your new home, hence diminishing your tax benefits.
Even if you don’t plan to invest in property now, an offset account will adapt better than a redraw facility should your circumstances change. Hence it is crucial to get the structure right from the start, feel free to contact us if there is any questions regarding the best loan structure for your property.
© Allen Tong and Kaya Finance, 2017. Excerpts and links may be used, provided that full and clear credit is given to Allen Tong and Kaya Finance with appropriate and specific direction to the original content.