Strategy: Don’t Keep Large Sums in Offset Accounts

Strategy: Don’t Keep Large Sums in Offset Accounts


In the good old days investors used to get IO loans on the main residences and they used to just build up cash in the offset account rather than paying the loans down. This was a great strategy while these 3 things remained:

a) Interest rates on IO loans were the same as PI, and

b) Interest rates on investment loans were the same as owner occupied loans, and

c) Servicing was relatively easy to qualify for.


As a result many investors have non-deductible home loans fully offset, and many have investment properties with large sums offset.


Now things are much different and many people do not realise that storing large sums is actually costing them money.


Here is an example

Bart has a $800,000 main residence loan, Interest only, with $800,000 cash in the offset account attached to this loan. Bart also has a $800,000 in investment loans on 3 investment properties all on IO.

Let’s say the rate is

• 3.92% PI owner occ
• 4.43% IO owner occ
• 4.59% PI investment
• 4.64% IO investment

For starters, Bart isn’t paying any interest at all on his PPOR loan so it wouldn’t matter if the interest rate is 3.92% of 9%.

But there is an opportunity cost because if Bart reduced that loan down to $1 and redrew it he could then use the $800,000 to pay down the other investment loans to $1.

At the moment he would be paying

$800,000 x 4.64% = $37,120 per year in interest on the investment properties.



Assuming he paid $800,000 off the PPOR loan and reborrowed to ‘refinance’ these investment loans he would suddenly drop the payments to:

$800,0000 x 4.43% = $35,440 per year in interest on the investment properties.

That is an immediate saving of $1,680 per year in interest.



But because Bart has no non-deductible debt Bart might want to consider going PI on this loan now.

$800,000 x 3.92% = $31,360 per year approx.. but because this is a PI loan with the balance reducing the interest would be even less. At worst it would be a saving of $5,760 per year.


Other benefits are the dramatic improvement in serviceability – even better if he would pay out the loan secured by the investment properties completely.


Some may worry about the deductibility of interest, but this will not change because it is the use of the borrowed funds that determines this and not the security.


Benefits are:

a) Saving interest

b) Increased servicing

c) Ability to purchase more properties

d) Paying down debt in general is a good thing


Downsides

a) Delayed retirement possibly – because cash to live on is tied up.

b) Higher repayments due to loans being PI (but the lower rates makes up for this.

 

I've got a situation where I've got money sitting in a PPOR against a measly 3.69%. However it's fixed and even if I could pay off the principal, I wouldn't currently qualify for another loan, so I'd be worse off as I wouldn't have access to cash.

I think it should be listed as a downside in the post APRA world.

 

Would interest still be deductible on the $800K if Bart redrew from the PPOR loan and deposited the money into the offset accounts linked to his investment properties, rather than paying down the investment loans?

 

No

 

Hi Terry,
When you said reborrow to "refinance" the investment loans, the securities of the loans will be changed to investment properties or will it still be linked to PPOR? You are saying that the reborrowed funds will still be linked to PPOR and the interest is deductible due to the usage of the borrowed funds? Thank you!

 

Yes Mcube, no changes in security.

 

Ok but interest against the former PPOR loan should be deductible if the redrawn funds were used to pay:

1. Part of the IP purchase at settlement, including associated stamp duty and fees.
2. Interest associated to the IP.
3. Directly into the loan for the IP.
4. Other expenses directly related to the IP, e.g. maintenance, renos, rates, etc.

Have I got that right?

 

Hi Terry, ok, that's great. Is it a different concept from reborrowing to pay a 20% deposit for an investment property? Because I paid down 120k into the PPOR then reborrow it to buy an IP last year. However, the interest on the 20% loan is still classified as an investment loan so the interest rate is still higher than the owner occupier. It is with CBA.

 

Hi @Terry_w,
Thanks a lot for all your tips and strategies,
Its posters like you who makes propertychat such a wonderful learning tool.
Highly appreciate your efforts mate, please keep educating us all.

 

Yep, second that. Have spent hours reading your posts and learned heaps more than I ever thought I would.

 

If you borrow to invest in income producing assets you can generally claim the interest.
But you have to consider Part IVA to borrowing to pay interest and expenses. See my tax tips on these topics

 

This thread is about a slightly different topic, but what you have done is ok.
What I was writing about is reducing the owner occupied loans and debt recycle back into an investment loan.

Example
$500,000 property. $400,000 loan secured against this property and $100,000 from a loan secured against the main residence - but at investment rates.
$200,000 cash in the main residence offset.

What could be done is a new $100,000 split be formed secured against the main residence. $100,000 from the offset used to pay this down to $100. Then reborrow and pay off the $100,000 investment loan (to $100 - don't close it).
If investment rates are 5% and owner occupied 4% this would save you $1,000 per year without any tax consequences (other than having $1,000 less to claim).

 

Don't forget I have the first 50 collated into an ebook. the next 50 coming soon.
www.propertytaxbook.com.au

 

@Terry_w the link seems to be wrong or your website might be down.

 

I just check it and it is working
try
propertytaxbook.com.au

 

Neither with or without the "www" work for me. It looks like some sort of DNS error perhaps.

 

Hi Terry, Thanks so much for your tax tips. I think I got what you mean. But, why should I need to leave OO loan and investment loan open? Is it for the tax purpose or future borrowing?
Basically, I will end up with 1 Owner occupier loan, 1 reborrowed loan and 1 investment loan since I will need to leave the existing loans open.

 

Dont agree.....great if you can't borrow any more ...

But if you want to borrow more and manage CF this is death!

 

Anyone else having this problem? Some others have reported problems but always works when i click on it with different computers.

 

I can access PropertyTaxBook.com.au