Offset account and inflation

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

 

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.

 

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.

 

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 .

 

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.

 

That's why many central bankers don't want deflation, they want moderate inflation. It makes debt erode in value.

 

So what are the considerations of going IO offset vs P&I offset?

 

@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

 

Cheers @albanga - might have been this thread Interest only with an offset against PPOR

Jamie