Mortgage offset vs personal savings acct

I’m looking for some advice on a positively geared investment property.

House 850k
Mortgage 550k
Rent 610 pw
No depreciation (old house)
Personal savings of 35k and growing

The mortgage has an offset facility into which I can add funds to reduce the amount of interest due on the mortgage. If I have spare personal funds, is it better to put them in the IP offset or in a separate personal savings account?

I know that I will lose potential tax benefit of higher interest to offset the profit on the property. But it will also mean that I make a higher (albeit taxable) profit on the IP. The alternative is to put them into a personal savings account.

Personal savings are at about 3% but the mortgage is just over 4%.

How do I work out which is best?

Many thanks
Steven

 

I think the net results are the same if the interest rates on your loan and savings are the same, so in this case, the offset is better.

 

Would you rather earn 4% or 1% interest?

Offset will be better because the interest rate is higher.

But if you are considering putting your money in someone else's savings account it may work out different as the tax payer will be different.

 

3% savings account sounds high - but even if you can get that rate it would be better in the offset.

Just do the maths.

 

A 'good' savings account will probably earn 3% in interest. You'll also pay tax on that interest so on average people would loose about a third. You'd net 2% on a savings account.

The offset account will save you at least 4% in interest. It's a saving, so it means there's no payment made, so no tax payable.

Most likely your net return from an offset account is at least twice that of a savings account.

 

Peter - tax would be payable because it results in less interest being charged which results in higher income.

 

Re depreciation, has a QS actually looked at it or is it a guess that it's not depreciable?

 

Do you have a partner who doesn't work? If so, putting the funds in a saving acct in their name can work out well if you're a high income earner. The partner won't have to pay any tax on the interest, and you keep your deductions.

 

I do have a partner, we're not married but have a child so do a joint tax return. She does not work at the moment. Can we still save on tax in this way? I thought that all our finances were just rolled up together. Is this not the case?

 

Say your partner doesn't work and he/she can earn interest in a savings account of 3%. That's an after tax return of 3% because he/she is below the tax free threshold.

If you're saving 4% interest when your money is in an IP offset account and your marginal tax rate is 34.5% (including the Medicare levy) that's an after tax return of 2.62% (4% x (1-0.345). The difference is greater if you're on a higher tax rate.

Of course if you have a PPR then any money you save from a PPR offset account is tax free so all bets are off.

 

Keep in mind there are various consequences to putting your money in other people's accounts - make sure you document it as either a loan or a gift.

 

There's no such thing as a joint tax return. You each do your own individual tax returns.