Interest Only, Tax Deduction & Offset Account

Hi,

I am currently in the accumulation phase hence haven't been focusing much on debt reduction. But given the current interest rates have thought of also paying down some of the principal on one of the IP.

I have been reading through many conversations and some prefer not to reduce the IO to ensure maximum tax deductions while building on the cash reserve and deposit for the next IP. My questions are:
1. IO is paying extra payments on one IP beneficial vs
2. Putting that extra in savings account not linked to any IP
3. For full tax deductions benefit is it better to maximise on interest payments
4. Better have an offset setup on one of the IPs reduce the interest but not necessary paying down the principal.

I don't have a PPOR so i haven't set up the Offset to reduce my interest with the intention of maximising tax deductibility but not sure if that is the best way of managing it.

Your comments will be greatly appreciated.

 

4. Yes from a tax point of view, but you have to factor in other issues such as serviceability too.

 

@Terryw Thanks , so I suppose to improve serviceability would be better off trying to reduce the interest paid vs increasing the cash reserves?

In addition , my IOs have redraw facility which i read is almost similar to Offset but different in that there is some restrictions with some of them as well as fees.

So if i make extra payments above the monthly will also slowly build a buffer whilst reducing the overall interest payments

 

PI loans would service better than IO loans. Paying off chunks of an IO loan would not really help.

 

@Terryw I thought having a redraw will offer the same benefit as a PI with added benefit can redraw funds for future funding if required. Might be wrong

 

Redraw and offset accounts are treated very differently by the ATO. When you store funds in an offset account and transfer funds in/out - this does not change the purpose or tax deductibility of the loan which it is attached to.

On the other side every time you pay funds directly into a loan and then redraw from that account, that is considered new borrowings. if those funds are not used for investment purposes you've contaminated your loan with non-deductible use and causing some potential significant tax issues.

Stick to IO with an offset account, store any cash funds in offset - nice and simple.

 

@Corey Batt Thanks now i understand it better. So if you still want to maximise on tax deductions would you still use the Offset vs a normal savings account? Ultimately with the offset you want to reduce your interest payments during that period not necessarily the principal

 

An offset will give you a 4% return approx while a savings account 2%

 

This. Take the highest return - it's not about making more tax deductions if the only way it's being done is by losing money - the long term goal is the more money in your pocket the better.

 

Thanks guys yes good point easy to miss that one. Better return always comes first

 

The tax position would be the same assuming you could invest in a savings account at 4% or leave in an offset account on a loan at 4%

 

@Terryw thanks for the comments,

One more i read from some of your postings that redraw is only good if you plan to use it for investment purpose hence means if you plan to save using whilst still having the benefit of freely spending it as you wish like you have with Offset is not an option.

In a situation where the only option is using redraw is it wise to still put money knowing very you can't access unless investing? I know you will still have impact in reducing your debt which i suppose will help with servicing in future borrowing power assessment

 

Your wording is vague what do you mean by "put money"?

 

@Terryw I meant on an IO i put extra payments hence reducing the principal. In an offset setup the principal won't be reduced but can still access the funds without restrictions whereas once extra payments are done taking it out will be like a new loan right?

 

I think you are saying you are depositing extra money into a loan and paying it down quicker. Yes you will be creating new borrowings if you withdraw from the loan.

Best to avoid

but if your loan will never be deductible it don't matter too much. The bigger issue is creating a mixed purpose loan when taking the money out - unless you can split it.

 

Thanks @Terryw