Offset accounts – God’s gift to mortgage strategy! (Ep.48)

This week we return to our podcast episodes recorded prior to Coronavirus. In this episode, we discuss offset accounts, God’s gift to mortgage strategy!

The effective use of offset accounts is one of our Top 5 strategies for creating wealth through property, it greases the wheels of the other mortgage strategies – optimisng tax deductions, ability to hold and accumulate property, money management system, risk management and offset accounts.

In this episode David Johnston, Cate Bakos and Peter Koulizos take you through: 

  1. Optimising tax deductions, how utislising your offset account will help you to save tens of thousands in future tax deductions over your lifetime. 
  2. How offset accounts can help you to hold property you would have otherwise needed to sell. This alone may add $1,000,000 to your bottom line in retirement.  
  3. Calling all upgraders, how you can put your best foot forward and maximise your ability to keep your current home as an investment when you upgrade. 
  4. Why offset accounts and your mortgage strategy are fundamental to your risk management.  Counter intuitively, as we have said for a long time, a lower forced payment allows you to build up more savings via your offsets without costing extra interest, allowing you to build up savings buffers and have additional surplus monthly cash flow.  
  5. The government and banks targeted mortgages during this crisis to help the economy. Great to see the government and banks get on board with our long-held mortgage strategy during a crisis! 
  6. An offset account is not the same as redraw; and misappropriation could not only cost you tax deductions, you might also get in trouble with the ATO! There is a critical difference which confuses many and could cause you to fail the ‘purpose test’. 
  7. How offset accounts provide the platform for your Money Management System  
  8. Many lenders now offer multiple offset accounts that can be linked to the one loan keeping more dollars in your pocket through interest savings and better tracking of your spending.  
  9. Interest earning accounts V offset accountand why an offset account has greater financial benefits to you.  
  10.  Interest only V principal and interest – How your repayment strategy can provide you with choice and flexibility whilst optimising your tax deductions, managing risk, growing your cash savings buffer, and enhancing your ability to keep and accumulate property. Counter intuitively, sometimes paying less is more in the long run – if you are using offset accounts of course.  
  11. And of course, our ‘gold nuggets’! 

We wish you and your families the best of health and say a big thank you to all our health workers during this time. 

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Show notes

  • What is an offset account – the grease of the wheels of all the mortgage strategies. It’s a savings account that reduces interest payable on your mortgage, in the same way as if you are repaying mortgage directly into the loan. It is a separate account to your loan and it is in credit. There is no detrimental impact in terms of tax deductions, ability to hold property and build up your available funds buffer for risk management.  
  • Tax deductions – If you’ve paid down your mortgage, you can’t just redraw the money back out and claim it as a deduction on that property, because it fails the ATO purpose test. By putting your savings into an offset account, you preserve the ability to claim those deductions. What determines the tax deduction is not what the money is secured against or where the money comes from, it is what the money is spent on.  
  • You can only claim interest on the amount you borrowed on the day you purchased the asset, it often makes sense to borrow the full amount of the purchase costs and not use any cash, so you can maximise your tax deductions (if you have equity in other properties and you are able to do so). You are preserving your tax deductions for the future and your cash base.  
  • Buckets – grow, life, fun and investment buckets. A lot of lenders these days allow you to have multiple offset accounts linked to the one loan. Every dollar you have in savings can be reducing the interest payable. 
  • Interest earning accounts v offset accounts – the interest on loans is always higher than the interest on an interest earning account, which means that you are better off financially by putting money into an offset. The added downside of interest earning accounts is that you have to pay tax on the earnings.  
  • Risk management – there is a lot of merit to having flexibility to make it through difficult situations. Having an available funds buffer to get through a period where your income is reduced, you’re changing jobs, going on a holiday, etc.  
  • Interest only v principal and interest – where you have a plan and are disciplined, interest only with an offset gives you more flexibility. If there is any chance that you have a home and you’d like it to become an investment in the future, you want to be building your cash savings and building up your funds buffer. The additional tax benefits of deductions you could claim over the next 20 to 30 years, could come up to the $100,000s by not paying down your loan. Calculate what your P&I repayment would have been and actually make it into your offset account and saving it away. You can also preserve a lot of deductions by making the minimum P&I repayment and saving the extra into your offset account.  
  • Owner occupiers and investors – should both look at mortgages that come with offset accounts. Most bargain rates do not come with the option of an offset account and they also do not come with a person who can talk you through these considerations.  
  • Does every mortgage come with an offset account – mostly available with variable rates, there are a few lenders that allow you to offset against fixed rate loans. However, offsets are only available for residential property, not commercial.  
  • Upgraders – the most common mistake we see, is that home owners have diligently payed down their property and are now looking to upgrade. They’d like to keep their current home as an investment, but they’ve lost all the tax deductions because they’ve paid the loan down. They then have to make a decision, do you sell and get the CGT discount or keep the property without the ability to claim tax deductions? You need to do a cost benefit analysis to reach the right decision.  
  • Who is an offset account not a good idea for – if you only plan to own one property, it’s your home, you won’t have much money in your offset account anyway and you have a low risk tolerance, then maybe an offset account is not good for you.  

David Johnston – The Property Planner’s Golden nugget: the offset account, God’s gift to mortgage strategy, one of our top 5 strategies for creating wealth through property.  The offset account greases the wheels of the other mortgage strategies – risk management, optimisng tax deductions, ability to hold property and your money management system. Be very weary of not having an offset account and talk to a strategic mortgage broker.  

Cate Bakos – The Property Buyer’s Golden nugget: redraw is not the same as offset, it can be free, you can use it to pay down the loan but you are missing out on a lot of future benefits. If you go to redraw some money and you need to be credit assessed to get it back, that money you thought you could clutch back stays in the loan.  

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