Offset vs no offset

Discussion in 'Loans & Mortgage Brokers' started by LilyL, 16th Mar, 2021.

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  1. LilyL

    LilyL Member

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    Hi Guys,
    Need your advice
    I applied for a OO, P&I loan with 20% deposit, but now, after final approval is done, I received an extra cash/windfall.
    I still can restructure the loan, as it is not drawn yet.
    Should I restructure the loan and keep extra cash in offset account or should I deposit this cash and draw less loan amount ?
    Is there any difference in between using the cash from offset or using equity from the paid down loan when buying investment property later?
    Am I right thinking that majority will depend of serviceability regardless if cash is in offset or loan amount is less?
    Thank you
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  3. LilyL

    LilyL Member

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    Hi Terry,
    Thank you for the reply.
    Am I right thinking that it would be better to split the loan on several splits and then pay down one split with this cash instead of keeping the money in offset?
    And then re-draw that split to use it for IP?
    For example, loan is 900k. Split it on 3 equal parts, one is fixed rate and 2 variable ones. And then pay down one variable part with cash and redraw when needed.
     
  4. Trainee

    Trainee Well-Known Member

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    The other question is what if you need cash later for a holiday or car.
     
  5. Tony Xia

    Tony Xia Structured Loan Advisor Business Member

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    Logistically keeping cash in the offset or in redraw works the same with interest charges, but how the loan will be treated down the track if it becomes an investment is different.

    But if you have an offset account just use that.
     
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  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    that s something you need advice on.
     
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  7. Momentum

    Momentum Well-Known Member

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    Keep it simple, just put your extra cash windfall into an offset account against any variable loan you have. Loan interest deductibility is determined by it's use but keep things flexible by using an offset instead of redraw. 90% of fixed loans don't have an offset so only fix what you don't plan to offset
     
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  8. LilyL

    LilyL Member

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    But then if I withdraw offset to buy IP, I will have non-deductible debt on OO.
    If instead I pay off one split, I then can re-draw it for IP and it will be deductible
     
  9. LilyL

    LilyL Member

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    For this, of course you need to leave some cash in offset
     
  10. Tony Xia

    Tony Xia Structured Loan Advisor Business Member

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    Thats when you start using a debt recycling strategy.
     
  11. LilyL

    LilyL Member

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    Yes, I just spoke to the bank, once one split is paid on a standard loan, it will automatically close and I won't be able to use redraw for IP.
    It is only on LOC this strategy will work.
    So, it's OK, will keep it simple
    Thanks Momentum
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Thats not true. None of my clients use LOCs
     
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  13. LilyL

    LilyL Member

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    Well, that's what they said.
    Maybe had to use your service from start, but now it is too late. Will split into 2 parts at the moment.
    Thank you
     
  14. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    Nobody uses a LOC, you'll pay about 2% too much. You'll also have to reapply because there's more involved in this product than a simple split loan.

    What most people do is pay off all but $1k of the split. Many then redraw these funds to an offset account against that loan. They don't transact anything else in this offset account, keeping it exclusively for use of whatever the split was intended for. No other transactions, no repayments, keep it clean.
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You just have to make sure there is redraw and that you don't fully pay off the split.
     
  16. kierank

    kierank Well-Known Member

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    With the boom that is underway in Oz at the moment, when buying an IP, take out a new loan for 20% deposit secured against PPOR (using its increased equity) and 80% loan secured against the IP. Interest on both loans will be tax deductible.

    I have a general principle with money - never hand over more money than one legally has to, whether it be the ATO, creditors, banks, ...

    In other words, keep one’s excess cash for one’s own use, not hand it over to someone else to use.