Does it make sense to invest in ETF's/LIC's with money from Offset account

Lets say you have quite a bit of cash saved up in your IP offset accounts, but in the current climate of high prices in Melb etc you're not comfortable to invest in another IP, does it make sense to invest in ETF's/LIC's in the medium term, rather than just having the the money sitting in the offset account offseting the loan? Assumption is that the IP loans are currently at 4% interest.

 

@trinity168 has... it makes sense. Long term, (1979 to now), industrial shares have had a 14% annual growth when you take in to account the dividends and growth.

My only warning is, shares go up and down, and it shouldn't be considered as a short term investment.

 

You may be better off having a separate loan to the value of the offset which you use to invest. Then the borrowing costs are tax deductible, and you're still getting benefits from the offset account.

A diagram I shamelessly copied from the Peter Thornhill thread will likely describe it better than I ever could.

 

It depends.

If you have non-deductible debt it may be better to use the offset money to pay down the debt and reborrow to invest making the interest deductible.

I can't comment on whether it is a good idea to invest in shares or not, but do you think the return would be greater than the interest paid on the loan associated with the offset?

 

↑ What Terry_w says. All about returns vs interest paid on loan.

 

No non deductible debt, only debt against IP's

I suppose that is the key question, and whats prompted me to ask the question. I've noticed quite a few people on the forums looking at probably investing in shares at the moment, rather than looking at a property. I would also presume most of those looking would also be using cash that is borrowed or in offset accounts. So I would love to here from people who may have done this?

 

I don't like to borrow for shares. I saw too many people get burnt during the gfc.

While I am buying shares I do it through my smsf. I have no debt in my smsf and it is a long term asset.

The franking credits on the dividends wipe out the tax payable on the income (excluding employer contributions).

So no - not borrowing.

 

Maybe I should be a tad more specific in my question. I have approx 280K in offset accounts and 400K sitting in a loan split that has not been used yet. I'm contemplating diversification in shares, rather than another IP purchase.

 

Why don't you hedge your bets and put say 100k into LICs /ETFs and leave the rest there for when / if a future share market opportunity arrives.
This leaves you with an active starting position if the market rises but also plenty of cash reserves to capitalize on good share market conditions if they arise over the next few years.
Also leaves you with plenty of SANF for now

 

Disagree totally.

The GFC like previous crashes was the perfect opportunity to borrow to buy shares. In fact sharemarket crashes / bear markets are the only times I borrow to invest in shares. And we retired early thanks to this strategy. Come the next crash even as retirees I'll be in there with ears pinned back repeating the process.

We have NIL debt at the moment and a fat cash buffer so ready to rock and roll come the next round of doom and gloom.

 

Was this due to margin calls? I'm interested to know more if you're comfortable sharing.

 

Say the Interest Rate is R.
Tax rate is T.
Dividend rate is D.

So, by placing the fund 100℅ into shares will give D℅.
The extra interest we need to pay is R℅
There is a negative gear benefit. So the actual loss = R x (1-T)
So as long as D > R x (1-T), also the price doesn't fall, we are better off.
Eg: R = 4℅, T = 37℅
R x (1-T) = 2.52℅
So any shares gives more than 3℅ fully franked dividend should be fine.

 

I do this, build up a certain cash buffer in the offset and then anything over that gets paid into non-deductible debt and reborrowed for funds (both direct and ETF), LICs and direct shares.

To date, the portfolio consists of 14 funds and 11 direct/LIC shares; growing at 12.3%/yr after fees and tax on distributions/dividends. Is it as fast as property? No, but for liquid assets I'm happy to trade some growth for liquidity.

 

I'm in the same situation, however my offset is against current PPOR. Would keep a good buffer in there but am considering moving some into shares. For me it doesn't make sense to pay down the debt and re-borrow to invest as this PPOR will become an IP next year. However if I was in your position with no non deductible debt I would be investing the funds in ETF/LIC's

 

Current offset is "earning" 4% so if you can achieve a better return minus tax then it makes sense to me.

 

Interest on the reborrowing will be tax deductible, just the same as it will be next year when the property becomes an IP. Main difference that I see is that it becomes deductible sooner

 

Hmmm you have a point there

 

I like the idea - but am waiting on market to be a bit cooler. Happy to sit on the side lines continue to build up buffer in offset until I'm ready.
Whilst I believe could make >4% in dividends (being approx current interest rate). I also like getting some CG also.
So for now happy to wait until there is a nice pull back in the market and 'gear/leverage up' then.

 

Just trying to get my head around this:

So lets say:
D=4%
R=4%
My T=31%
So, R x (1-T) = 2.76.

Now, doing this for partner:
D=4%
R=4%
Partner T=15%
So, R x (1-T) = 3.4

So, does that mean if shares were investing in partners name, with borrowed funds that are full tax deductible, then partner would need to have shares with fully franked dividend >3.4%, as opposed to shares in my name having a dividend > 2.76% ?

 

Yes. Because your partner's tax back from negative gearing is lower. Higher return is needed to compensate the lower negative gear return.