Join Australia's most dynamic and respected property investment community

Offset account and inflation

Discussion in 'Property Finance' started by Whitecat, 10th Nov, 2015.

  1. Whitecat

    Whitecat Well-Known Member

    Joined:
    3rd Jul, 2015
    Posts:
    1,081
    Location:
    Brisbane
    Wouldn't an issue with an offset account be that when you extract the money from the offset in the future to go and purchase another property that you are extracting the money that over time is build up with no interest and is therefore a savings amount that has been affected by inflation?
    Maybe no problem if only for a couple of years but trying to work out of this will be an issue over a longer period.

    Or is it that the interest saved is the same as compounding interest paid anyway?
    Also what are the advantages and disadvantages of an interest only with offset and a principal and interest with offset?
    Thanks
     
  2. Bullion Baron

    Bullion Baron Well-Known Member

    Joined:
    25th Jul, 2015
    Posts:
    589
    Location:
    Adelaide, Australia
    Are you better of forgoing 2-3% interest on savings (- tax) to save paying 4-5% mortgage interest on equivalent funds? You will have been able to save more (in theory) by the latter rather than earning the interest on savings.
     
    Whitecat likes this.
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,949
    Location:
    Sydney
    Generally you wouldn't do that but borrow to invest. The money in an offset has saved you interest on the loan while it has been in the account so it has been build up with interest. But a $100 today will be worth more than $100 in a years time so you are correct in a way. But what is the alternative? Pay down the loan and reborrow - which is the same effect.
     
  4. Waterboy

    Waterboy Well-Known Member

    Joined:
    29th Aug, 2015
    Posts:
    326
    Location:
    Sydney
    Well as long as the offset interest saved (~~4.5%) is higher than inflation rate (~~2%), you should still be ahead.

    Savings account interest is taxable, and it's normally lower than offset interest saved, and in many cases lower than inflation after tax is paid. Savings accounts should be your last allocation of spare cash .
     
    Last edited: 10th Nov, 2015
  5. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,091
    Location:
    Melbourne, Nationwide
    An offset account saves more money than a regular savings account earns, this puts you ahead.

    When you've got cash in the bank inflation is your enemy as it degrades the value of that cash. The other side of the coin is that it also degrades the value of the loan. Look at what the average loan was 30 years ago and you'll realise that what was a big commitment in 1985 is only a few months salary today.
     
    JacM likes this.
  6. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

    Joined:
    14th Jun, 2015
    Posts:
    1,158
    Location:
    Gold Coast
    For the average mortgage holder on 4.6 and tax payer on approx 34 % youd need to earn near 7 % pre tax risk free to have the same net return as having the cash in offset................

    Petes comment on erosion due to inflation on both sides of the a&L sheet is in my view correct

    ta
    rolf
     
  7. Waterboy

    Waterboy Well-Known Member

    Joined:
    29th Aug, 2015
    Posts:
    326
    Location:
    Sydney
    That's why many central bankers don't want deflation, they want moderate inflation. It makes debt erode in value.
     
  8. Whitecat

    Whitecat Well-Known Member

    Joined:
    3rd Jul, 2015
    Posts:
    1,081
    Location:
    Brisbane
    So what are the considerations of going IO offset vs P&I offset?
     
  9. albanga

    albanga Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    1,105
    Location:
    Melbourne
    @Jamie Moore has put together a great post on this very topic. As an overview though there are a lot of benefits to going IO/Offset over P&I. These include things such as:
    - Keeping high tax deductibility if your PPOR ever gets turned into an IP.
    - In an offset its your money, not the banks. What happens if you get injured and cannot work? In an IO scenario you could simply use the offset money to survive until you return to work. If you paid down principal and have no savings in offset then how will you pay the mortgage?
    - It use to have some serviceability advantages I believe but not anymore (brokers?)
    - Finally and my favorite, it's YOUR money. There are 50+ scenarios I can think of that I would rather a larger debt being offset but knowing I can use it as required versus a lower debt but not knowing if I can touch the equity. I always think GFC, homes with 100,000s in equity became worthless, people lost jobs, banks shut up shop. Ask yourself would you rather of had lower debt and no savings or higher debt and savings? I know what I would have rathered, might have even purchased a few of these now $20,000 homes with money in my offset :)
     
  10. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,140
    Location:
    Canberra and Sydney
  11. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

    Joined:
    14th Jun, 2015
    Posts:
    1,158
    Location:
    Gold Coast
    It's all about risk transfer and control :)

    Placing the max control with the borrower


    And that's the same thing APRA has concerns about becaus in their views the majority of people using such structures are financially inexperienced to use them.

    There may be some valid data to support that view

    Certainly, in our pfactice someone with bad money habits is not going to be offered and io structure until they can prove they have changed their spots


    Ta

    Rolf