Mortgage+Offset Structure Enquiry

Hi PC,

I recently took out a mortgage which is linked to my everyday transaction account (Complete Freedom with St George).

Now my pay is deposited into this Transaction Account as well as where my Repayments are drawn from. The issue is, this transaction account is also considered as an offset account, however it's just a transaction account where there is no actual interest earned on the account balance.

Thus, does that mean this "offset" is pretty much useless? Instead should I take out an actual savings account and have that as the offset instead?

Thanks

 

It's not useless. Technically, in a way, you are "earning" interest on an offset account (much more even than a normal transaction account).
A normal transaction account might pay you 2% interest these days (so on $100,000) sitting in this account, you earn $2000 interest (and then pay tax on this!). But that same $100,000 sitting in a 100% offset account against a home loan is "earning" the interest rate of the home loan (maybe 5% home loan interest). That is, you pay $5000 less in home loan interest for the year with the offset money, then if it was not there. So $2000 vs $5000 (the offset account wins!). Think of the offset as saving you home loan interest, and you might think differently. You are gaining much more than having the money sit in a normal savings account.
I don't think banks have any product (transaction account) where they both pay interest, and allow you to offset against the home loan. That would be double dipping. Could be wrong here, PC?

 

An offset account will save you interest on the loan. The loan interest rate might be around 4% to 5%.

Show me a savings account that pays 4% interest...

 

And don't forget you pay tax on interest earned - but there's no tax on interest you're not paying!

All up an offset is a much better option than a saving account.

 

... and there is also no tax deduction on interest you're not paying, if the loan is for an IP. Less NG.

 

Thanks for all the prompt replies.

This is for an IP.

I somehow had the understanding of an offset account incorrectly. That is, you offset a savings account so the interest that would have been earn is instead taken off the mortgage instead.

But it does seem this is a 100% offset account (any way to double check? I'll re read my mortgage paper work again)

Another question:
From my understanding I can put monies into the loan, and redraw when required, without fees. Then should I leave my saving monies in offset or put into loan entirely to reduce the balance thus lower interest.

I remember reading TerryW tips and he mentioned to be careful mixing the type of monies

Need a bit of clarification.

Thank you

 

Oh boy. When mum and dad investors (and tax drivers) with no clue what they are doing get into property investing, you know the property market cycle has peeked, and its time to exit and sell to the noobs and lock in the profits. .

The money in 100% offset lowers the interest by exactly the same amount as having the money in the loan ( redraw). Thats why its called 100% offset .
However its better to have the money in offset accounts. It you use the money in offset for personal use ( holiday, etc), it does not affect the loan ( you can still claim the full interest in tax. If however you redraw for personal use ( its considered as a new loan for non investment use, so you can no longer claim that portion for the life of loan. Not the full 100% of interest.

 

DO NOT DO THIS!
Your reducing your deductible debt and mixing your loan if you redraw for non investment expenses.

Use your offset for any savings unless DO you have ANY non investment debt? Say a car loan, maxed out credit card? If so I would use any extra money to pay these things off to begin with.

Did you use a bank or a broker can I ask? Suncorp would usually be broker driven and I'm very surprised you wouldn't have been told all of this in great detail.

 

Advice taken.

Well luckily I decided to consult PC before I took action.

I went through the bank.

Also, I have almost no non-investment debts. Just a credit card that I may use on occasion, but I always pay it off in full in time.

I do have a savings account in another bank, but I think I'll consolidate all the funds into the offset at this rate. 2.2% on that account is worthless.

 

Just recently learnt this, and the potential mess come tax time when redraw is used for non investment use. its worth asking in depth which one you're getting. Some banks like Liberty call their product an offset when in reality its a redraw.

 

Hmm? That doesn't sound like happy news.

 

I just sat down had a solid read over my Loan.

Basically it's a 2yr fixed interest loan. Repayments are P&I. The transaction account is considered a "Partial Offset Facility".

Currently I have my entire cash savings of about 60k in this partial offset account.

Note: I did have some extra funds from the loan, title "Loan proceeds" placed into my transaction account also, which adds about another 50k on top (total 110k).

I wasn't sure if I should put these loan proceed funds, into the loan (does that reduce interest paid?), or have it sit in the transaction account.

I can't seem to find what the partial offset % is though.

 

Sounds like you have 2 issues
1. Borrowed at 4% to get perhaps 1%
2. mixed purpose loan.

which lender has a partiall offset? CBA used to

 

Sounds like Bankwest or Adelaide bank. Most lenders have a limit on how much you can pay into a fixed loan so just check this first.

 

St George actually. Reading the documents it's Max $10,000 extra repayments in a 12 month period for the fixed loan period.

Could you possible expand on that Terry? Especially the first point. Loan was to pay for house, and as well as cover part of the costs in building a granny flat.

 

In that case may not be mixed

 

Hey all, without starting another thread. Had to throw a sickie and decided to use that time to dive in depth with my loan.

Basically I found out that this partial offset account is at 0.7% vs a 4%+ off a fully offsettes account.

So I do have savings of more than 120k or so, which are currently sitting in this offset. What I was planning was to open a savings account, and have it gain interest (2.75%) than waste it in a partial offset.

I can't get a fully offset until my 2 year fix matures.

I understand there may be tax implications, but surely better overall than in the partial. Note I am expected to dive into this savings to fund the granny flat construction in the next few months.

What does PC think? Or is there other variables I should consider.

Thank you

 

@Obsidian I have been told that if you use the money in offset for personal use (eg spending on a $20k holiday), it will still affect the loan and you can't claim the interest on that $20k in tax due the the purpose being used from ATO point of view.

Maybe an experienced accountant here can clarify that. Thanks