SMSF Loan with/without offset account?

Because an offset is a great way to have liquidity and reduce your interest burden.

 

As Rolf said above one of the many limitations on SMSFs is the inability to extract equity/capital gains/ repaid capital from an asset in the fund. By keeping repaid monies in an offset account you can get the benefits of repaying the monies against the loan with out actually paying it off the loan and therefore it can be accessed from the offset account to be used as cash if required or as a deposit to leverage into another asset.

You get the same benefit by paying it off the loan but it is "trapped " in the asset until sold.

Offsets give you flexibility and liquidity and in a low interest environment a good ,safe return.

 

See responses above - 'nuff said

 

Hi people long time follower first time poster. I've recently received a pre approval for a smsf.It is with a bank that does not offer offset accounts and only a 20% deposit. Reviews of the bank have been pretty dodgy and im a bit worried with following through.
I would rather provide a 30% deposit and lower borrowing capacity with an offset account than what i have the pre approval for.
Question is, is it more worthwhile to go for the latter plan than to go for what i have.
Also, can someone explain how a offset account works in a smsf? My understanding (apologies if im wrong) If you buy a property for 240K and you provide a 30% deposit then you are borrowing roughly 170K. If i have 50K left in the offset of my smsf then im only paying interest on 120K? Is this correct? Apologies as i am a noob.

Thank you for your time.

 

Yes, but it is not 'you' or 'i' but the SMSF that is borrowing and the SMSF's money that will be in the offset account.

 

OK. Thanks for that.

 

IMO a SMSF loan should generally be structured so that the property cashflows are neutral to positive. Negative gearing in a SMSF is the wrong concept as the tax benefit is 15 cents in the dollar. Only is very large funds is this an exception and then the concept of leverage has limited benefit anyway.

Leave neg gearing for salary earning taxpayers. It also means contributions MUST be maintained to resupply the fund with cash and that is like burning $20 notes in a fireplace to keep warm. I would recommend doing the maths on each prospective purchase to identify its cashflows prior to interest to identify the breakeven point eg $15,000. Then divide $15,000 by the rate of interest to identify the loan required to give you breakeven eg $214,250. So on a $250,000 property you need to fund ALL acquisition and establishment costs (legals, duty, bank legals, structure, inspections etc) plus $36K deposit and settlement shortfall PLUS ensure a suitable buffer remains in reserve. Remembering that if the fund runs out of cash it MUST either obtain contributions, rollover funds OR sell the property.

Offsets accounts are brilliant if the lender has them (most dont). They mean that instead of parking cash in a savings account which earns 0.01% that the ""savings"" account offsets the loan balance so that each $1 of loan held over a full year equates to approx a 7% earning rate. Your example is correct.

I am always concerned when people go into a SMSF and also a SMSF borrowing with poor understanding of the financial implications. In a great number of cases just before settlement the lender hits you with a requirement for a financial advice certificate which can be VERY hard and very expensive to obtain if you have precommitted to a DIY plan that is high risk or even just badly conceived.

 

You are assuming the fund either must hold or wants to hold CASH.. The correct answer for a SMSF is that a offset is a clever way to achieve the equivalent of a 7% earning rate on cash that is within its defined investment strategy. If the trustee strategy is not to hold much cash then the benefit of a offset is of very limited value.

 

Hi there noob

Assume its Resimac?....not preferred at all. They offer 80% and I personally donot like them!

If you would like an offset then St George / Bank of Mel is the way to go, but expect a long turnaround - use a broker as the application process can be time consuming and most business bankers are useless - especially when this is a small loan....I have a couple of articles on offset on the Redwood site, however will not provide a link.

Hope that helps....

Cheers Ivan

 

I understand that this thread is now a little old but just came across it, if you cannot access an offset within a SMSF would another option just be to invest the excess funds into shares. I understand that the offset account is safe money but would you really have 200, 300 or 400K sitting in cash within the SMSF. Are the few comments about being crazy for not having an offset warranted if you have this option, albeit maybe carrying a little more risk but you may also be able to achieve better then 7% return in shares.