Power up your property with an offset account
There’s plenty of ways to optimise your property but one that doesn’t involve renovation or development is to use mortgage offsets. Used strategically, offsets can take years off your loan, increase your equity and make every dollar work harder.
What is a mortgage offset?
An offset account is a savings account or transaction account linked to your home or investment property loan account. The account’s balance (or a proportion of that balance) is ‘offset’ daily against your loan balance, and as a result you’re only charged interest on the difference between the total loan balance and the amount offset.
Offset accounts may be linked to either a variable rate loan or a fixed rate loan. Some home loans may specify that the offset applies for a fixed term, such as a 100% offset for a year against a 1-year fixed rate loan.
How does an offset save money?
Offset accounts work by offsetting up to 100% of the balance of the linked savings or transaction account against the balance of the linked loan.
In the case of a mortgage offset account, the balance of the account reduces the balance of the mortgage that incurs interest. For example, if you had a loan of $350,000, with $100,000 of savings in a linked 100% offset account and $100,000 repaid on your loan, you will only pay interest on $150,000 of your balance.
This means the lender charges you less in interest because they are not charging you interest on the full, actual remaining balance of your loan. As a result you save money by paying a lower amount of interest, and can mean you will be able to pay the loan off in a shorter period than planned.
Maybe . .don’t pay the loan off?
Instead of paying the loan off, consider utilising the funds in another way. This may seem counter intuitive, but 100% offset accounts can be a good reason to keep your mortgage active. Depending on your goals, you could be better off using the funds for a renovation or to invest rather than paying off your home loan.
For example, if you have built up $100,000 in your offset you might be able to utilise these funds as a deposit on another property. Always take into account the increased interest this action would incur, so it’s usually best to do some scenario planning with a qualified broker or property advisor before taking any action.
Upside to keeping your loan active
- Access to funds -This approach allows you to access the money in your offset account to invest, to pay off other debt or even to fund renovations.
- Cash buffer – If you pay the mortgage off in full, you won’t have money in your offset account to access in an emergency. Keeping money in your offset account allows you to create a rainy day fund that provides protection against the uncertainties of the future.
- Future opportunities – You may decide in the future to use the money in your offset account to help fund the purchase of another property and turn your current home into an investment property. In this case, the interest repayments on your outstanding loan balance could be tax deductible.
- The property isn’t yours – The bank still has a claim to your property until you pay the loan amount off in full.
- The loan still looms – Many people prefer to pay their mortgage off in full and have the weight of debt lifted from their shoulders. This allows them to clear the financial slate and then start saving for the future.
- Fees – The lender may charge fees in order to maintain your offset account, and there may also be ongoing fees that apply to your loan.
Make extra repayments
One potential alternative to an offset account is making extra mortgage repayments, which can reduce the principal owing on your loan, and help shrink your interest charges. However, this may lock your money into your loan making it harder to access if you need to pay for a surprise expense, whereas the money in an offset account is often a just a withdrawal away.
Mortgage redraw facility
A redraw facility is a feature available on many home loans, where the borrower can withdraw funds already made to pay down the principal of the loan. However, there are reasons why this facility may not be as convenient as an offset account:
- some lenders set minimum re-draw amounts and charge a separate fee for each re-draw
- some lenders can make you wait a few days before they will give you access to funds
- redraw facilities often lack the fully transactional characteristics of offset accounts (eg Bpay).
There is one major difference to consider when making the choice between offset and redraw – funds withdrawn from an investment loan redraw facility for personal use can ‘contaminate’ the loan. This means the ATO may impose limitations on the interest deduction claims.
For example – a situation where you withdraw $30,000 from your investment loan redraw facility to pay for a holiday or school fees. If the loan was $300,000, then it’s likely the ATO would deem this investment loan to be only 90% tax deductible for the life of the loan.
However, by using an offset instead of a redraw, you will avoid any deductibility issues because the offset account is a separate facility to your loan. This means you could withdraw the funds you require and the loan will still be fully tax deductible.
Get quality advice
Before you make any decisions regarding your funding structures, ensure you think through the full range of choices available to you. The finance industry is constantly changing so ensure you discuss your range of options with a qualified finance broker or property strategist unless you’re an expert in this area yourself.
Buy smarter = limitless ways to build lifetime income
Crave Property Advisory is a unique property strategy and buyers agent service. As the only independent and unbiased advisory that can help you use any property strategy Australia-wide, Crave’s services extend to home, investment and commercial property. A highly client focused organization, Crave developed the Modular Investing System (MI System) to provide clients with the ability to use a tailored mix of strategies and efficiently build profitable portfolios that create lifetime income.
Debra Beck-Mewing is the CEO of Crave Property Advisory, and has more than 20 years’ experience in property investing, Australia-wide. She has used a range of strategies to build her property portfolio including renovating, granny flats, sub-division and development. Debra is skilled in identifying development opportunities, and sourcing properties that have multiple uses and multiple exit strategies. She is a Qualified Property Investment Advisor, licensed real estate agent and also holds a Bachelor of Commerce and Master of Business.