Offset against IP debt

Hey guys,
An offset account is usually ideal against non deductible debt(PPOR for example) in order to pay less interest which is all good.

Was just thinking lately with all the changes in Interest Rates especially towards investors where investor rates are getting higher then OO interest rates.

Does it get feasible at any point in time to consider putting the offset account against deductible debt in such circumstances where interest rates for investors vs home owners are diverging sharply?

Tried putting some numbers around different scenarios and it seems like it's very circumstantial but still thought i'd ask and see what others thought of this.

 

If your PPOR is owned outright, then yes.

 

100% offset against non-deductible debt will always be a better outcome than offset on deductible debt.

eg 100k ppor debt @ 5% = $5000 non-deductible interest from after tax income

100k ip debt @ 6% = $6000 deductible interest paid from pretax income. Unless your tax rate is 0% ie super fund in pension phase or you earn <$18k, then the deduction is of more benefit, so offset to poor anyway IMHO.

 

A simple formula is 'After-tax interest rate = Interest rate on investment x (1 - your marginal tax rate)'.
So for example 5% (investment, interest only) x (1-0.39) = 3.05%. It is unlikely that you will be better off unless you have a low marginal tax rate.

 

If your home is paid down and you want to reduce your total debt exposure then using an offset makes sense.. why would you want to pay the bank 4% and then have them pay you 2.8%?

Otherwise the interest rate differential between investors and home owners cannot compare to the tax advantage. If you are on the highest tax bracket you will need the difference to be more than double.

 

Makes sense guys, thanks very much for that.

 

Yep, offset the PPOR first and then work on IP debt. Consider "debt recycling" the non deductible PPOR debt as well pending circumstances and goals.