To offset or not...

I have been looking at the value of savings versus inflation and am now looking at the option of removing the (substantial) savings in the PPOR offset account and putting it into dividend yielding shares. Mortgage is about $500k and interest rates are at 4.89%.

I already have shares with SOL, AUI, ARG and VAS, and like the dividend returns. I also have rental properties but HATE the constant emails around tenant requests and property upkeep, so I am not looking to buy another IP. Are many people still sitting with money in offset accounts?

 

At the moment you are getting a 4.89% tax free return from your savings in your offset account.

Depending on your marginal tax rate you may have to receive up to 9% to be better off.

 

There's a few companies with (fully franked) dividend yeilds easily outperforming money in an offset account, so financially it can make a lot of sense to invest rather than save money.

You can also do some debt recycling through your home loan, which gives you deductions on the loan interest so this increases the effective yield in the manner that Marg suggests as well.

Putting money into an offset account is a great place to store money where you want instant access and zero risk. There's also something to be said for owning your home outright, it takes away a lot of stress.

Investing in shares for dividend yields takes a bit of research, planning and strategy. Done right it will outperform the offset account but it's also riskier which you need to learn to deal with.

Personally I'm taking a balanced approach. I've been putting similar amounts into each and am at the point where I've got a large cash buffer, plus a decent share portfolio. I like a balanced approach to reduce risk and give some decent long term returns.

 

Would I be getting the same benefit of 'paying the loan off early' by leaving the money in the offset account or is there a better return by ACTUALLY putting the money against the loan. I am talking about $200K.

 

If you are talking having the funds in redraw or in offset, then there is no difference in return overall.

 

You should get the same financial benefit.

Overall an offset account offers more flexibility, especially for future tax planning. Lenders can also make a simple decision to cancel your redraw and reduce your loan. They can't do this with funds in an offset account.

 

Absolutely no difference, except:

If the money is in an offset account, you control it.

If you pay it off the loan, the bank controls it.

 

No I meant is there a difference between leaving money in an offset or paying the money on the loan (as in big lump sump payment paying the loan down). I know that the payment will shorten the life of the line saving about $290K in additional interest but I'm not sure if that makes good financial sense now? $150K paid off now saves $290K interest and pays off in 12 years...

If I was to leave it all in the offset and it is essentially the same as paying it off the loan, why not just pay it off the loan? I'm wondering now if the saved interest is a better outcome than shares?

 

Sorry I obviously misunderstood your question, as did others above. I still dont understand your question now? your talking about offsets/paying down the loan/investing in shares. 2 of them are identical in outcome (albeit subtle differences), shares are a different beast. can you reword what you want to know?

 

If you put the money directly on the loan it has the same effect as putting the money in an offset account. You can pay off the loan in full which will close the loan and you'll own the house outright. The benefit of this is you no longer have to make mortgage repayments (or you can reduce mortgage repayments if you partically pay off the loan and sacrifice the redraw to reduce the limit).

The shares vs offset argument depends in what shares you invest in. There's shares that have excellent yields that will definitely outperform the benefit of an offset account. With shares there's also more risk. If you can handle the shares constantly going up or down in value and you can find the right shares, then this is probably the better financial outcome.

 

In addition to the above, if you choose to pay your loan off completely, you will need to apply to the bank again if you decide in the future that you’d like a loan. (eg to upgrade your home or buy further property etc).

If you keep the loan open with an offset account you have greater flexibility and control over your cash. It can also be used as an emergency buffer too.

if your financial circumstances change in the future it may be more difficult to secure another loan.

 

With mortgage rates nudging 6% and the outlook for shares weak in a high interest rate/inflation environment, would it be better to park spare cash in an offset (against an IP loan vs say, an index fund)?

 

mid the rate is higher than the total returns on the investments yes

 

Well we cant predict the short term performance of VAS, AFI etc. and personally I think it makes sense to stick it in an offset and get a risk-free 6% return. But I guess you're forgoing negative gearing on the same amount as well...so its more like 4% ish net return??

 

Absolutely no one can tell you with any confidence whether the offset, dividend shares, or index-tracking ETFs will do better moving forward. That being said, I found the recent post by Ben Carlson interesting: What's the Best Long-Term Investment? - A Wealth of Common Sense

As per Peter's post above, Ben comments "The good news is you don’t have to pick just one asset class to invest in over the long-term. You can own stocks, bonds, cash, gold, real estate or anything else you want in a diversified manner."

 

not really. If you invest it and get a 6% return or offset an investment loan at 6% it should work out the same assuming the same taxpayer

but. You also have to consider potential capital growth as well

putting in another facet of a pi loan will also help pay down the loan quicker which can also improve borrowing capacity