Offset account

[Edit: thread split from http://www.invested.com.au/80/navra-financial-planners-15878/]

By Jan / Feb I should be debt free except for the current ppor, and would be in a position throw a nice percentage of my pay packet straight into navra retail (possibly considering a 50/50 split of navra and platinum Asia). Once a nice deposit amount is saved up in the fund (and after a few distributions) I would buy our new ppor and make the current unit a rental.

 

I really hope your current loan is IO with a 100% offset attached?

 

Why so Simon?

(at the moment its a 5 year fixed interest loan with ING, it was the only way the broker could give me the loan on a single income, we are now dual income)

 

Because this way when yo uturn it into an IP and then buy a new PPOR you can leave the max debt on the rented property and take all your repayments to the new PPOR.

Certainly don't make any big lump sum repayments into your current loan as you will not be able to draw them back to buy a new PPOR and still have the loan fully deductible on the first place.

hope this is clear...

 

The current loan does not have a redraw facility. At some stage I'll refinance the loan to interest only with offset and wear the break fee.

Is the reason for going interest only, to reduce the amount by which you would negative gear?

 

Going interest only improves your cashflow on two fronts: obviously the monthly repayments are less, but it also means that 100% of your repayment is fully tax deductible (as opposed to only the interest portion on a P & I loan).

I gather the theory would be to IO your PPOR, but treat it as a P&I Loan, putting your interest payments to the loan and the balance to the offset account. Then the funds in the offset account can be moved to the new PPOR offset account, making it nice and clean.

 

Simon,

You suggest this strategy quite often when this sort of topic comes up. I understand what you are saying, but can you clarify something for me?

Say I buy a PPOR for $300K. I could set up an IO loan for $240K, with an offset account. Aftyer 5 years assume I manage to build up the offset so that it contains $240K, so I have effectively paid off the loan.

Now if I want to move but keep the PPOR as an IP I just take out the $240K fro mthe offset and use it towards the new PPOR purchase, and my old PPOR is an IP with an instant $240K deductible debt againt it. This is good.

But what if I stay in the PPOR. I've got $240K sitting in an account, but as far as I can see I can't use it for investing without the interest payments on my PPOR loan kicking in again, which will be non-deductiuble. In this case wouldn't it make more sense to pay out the loan then set up a new LOC for $240K, and use this for further investing?

Does that make sense?

John.

 

You are right.

But now you have choices.

You choose to stay in the PPOR and wish to reinvest the cash.

The LVR, for some reason, hasn't gone up enough to allow you a tax deductible LOC.

So you can pay some/all of the Offset cash into the loan and redraw it via a seperate split/LOC to invest. Easily done.

I wish I knew this stuff earlier as I had to sell a small home which was all but paid off so I could afford a PPOR. If only I had known about offsets then!

 

The loan we took out was 6.74% fixed interest for 5 years from Jan 2006.
minimum repayments are 520.28 a fortnight.

We are currenty paying 600 a fortnight, but should be chanelling that 79.72 ING direct each fortnight to save up towards a) wife's loss of income during child birth (somtime during next 2 years) b) deposit money for new ppor.

The mortgage broker reckons leaving it a 520.28 a fornight for the rest of the fixed interest period will be more cost effective than switching loans and paying higher interest and better than switching to a different providor and paying a break fee.

To avoid break fees and only pay a switch fee (assuming a break fee isnt paid switching to another ING product) would ING action equity loan be better? It has redraw but no offset.

Is it worth wearing the break fee possibly upto 3k or so, to gain the flexibility of IO loan with redraw and offset?

 

Probably not.

Redirect the excess payments is a good idea provided that ...

You are not the sort of people who lack the discipline not to spend any savings on any doodad that catches your eye.

I know it is an obvious point but too many people cannot be trusted to manage their own savings and if you are one of them then the money is probably better in your loan account than available elsewhere!

 

Thanks Simon,
We will reduce our payments to the specifed minimum and redirect the the difference to ING untill it accumulates to the minimum navra deposit amount. (might even consider CFS geared fund as their minimum additional deposit amount is 0 I beleive and can use bpay or eft to put the funds in)

 

would the action equity loan from ING (INGBank then loans, then variable rate loans, then action equity loan) be of more use?

 

lol - if you want to invest it in managed funds then draw it from your loan via a split so that you are debt recycling.

If you want it for personal use (PPOR) then draw it from the offset.

 

thanks for the thread split sim (as another poster said you are a modgod?)

This question to the other Simon (the mortgage broker one).

Knowing that the current loan is an ING fixed interest P&I (no redraw or offset) at 6.74% for the next 3.5 years, and that within that 3.5 years (say 2 years) we want this unit to become a rental, is it best we stay with this loan and just pay minimum on it, or is their another ING product that would provide more flexibility, eg action equity loan. If you were the broker (and have 5 minutes spare to crunch some numbers) what would you advise?

(If I dont like the answer my broker gives me on Wednesday, you could be my broker )

 

I am not up on the ING suite of products but I doubt you can switch with no penalties - worth a call to check though.

If you can switch easily and cheaply then a simple IO variable with 100% offset might be best. Of course if there are a couple of rates rises you might regret it.

But in all honesty your loan amount is quite small and your timeframe short so the amount in principle you will end up with is really too small to make a difference. Just don't pay any extra into it - esp not any big lump sum payments ie a lotto win

I typically use a big four product and then into a pro package when the second property is bought, or straight into the pro package if a client prefers and he has concrete plans to keep buying.

I am in one myself and am paying 7.29% pa with full offset. In fact my offset balance is slightly more than the loan amount but this will change shortly when we start building.

Cheers,

 

I still think that this is largely a theoretical argument. In practice if you plan to convert your PPOR to an IP in a few years the I agree that haing an IO loan with off-set may make sense.

But I think most people are not in this situation - if you have a family then I think (I may be wrong) most people plan to stay in their PPOR for at least 5 to 10 years, and when they do move not all of those people would want to retain the property as an IP. It would make no sense to have a large amount of cash sitting in an offset that could arguably be put to better use elsewhere.

As an eample, take Michael Whyte's current situation. From what I can gather the PPOR is effectively paid off, with $175K in an offset (I think I remember these numbers correctly, sorry if they're off). If he isn't planning to convert the PPOR to an IP in the near future then this $175K is dead money. Why not just pay out the loan and redraw via a new LOC?

So, I think that while there is nothing wrong with having an IO with offset on the PPOR the majority of investors (ie, those not planning to convert the PPOr to IP in the short term) would be better off periodically paying down the loan and redrawing via an LOC, which in the end has the same effect has having a P&I loan.

John.

 

I think you missed one of my points John.

I agree with you 100%.

Thats why I like the flexibility the offset provides. When the time cames and you choose to invest that money then it is a simple matter to transfer it into the loan then redraw it or apply for a new loan for investing.

The offset gives you the choice. A simple P&I gives you no choices.

Who knows, when they buy their first home, what the future holds? The offset is an each way bet.

 

OK. Glad we're all in agreement then

I just wanted to make sure I understood what you were saying in case I was missing something. Thanks.

John.

 

I have a PPOR with a 5 year IO mortgage, it is 70% fixed and 30% variable, with the variable being attached to an offset account.

Anyways, we have been putting excess cash into offset account thereby reducing interest for the last few months, and now that is has reached over the minumum (25k) we are going to put that amount into the loan and get it placed into a LOC. The funds drawn from the LOC can now be used to invest in Navra and the associated interest will be tax deductible. Hence recycling part of our PPOR debt without moving out.

If we move out and rent the place out, we haven't actually reduced our borrowings, so automatically all money borrowed to purchase the residence will now be tax deductible.

I am very happy with the setup. In hindsight, i should have probably made the variable component larger to enable this to be done more often but at the time it seemed as though there was going to be another couple of interest rate rises, so this setup gave more security.

 

Sure, the total loan amount is still the same, but you have converted some of the non-deductible debt to deductible debt. That's great. But this illustrates my point exactly - most investors with an IO loan + offset on their PPOR will do this, and the end result is the same as if you had a P&I loan. If you now move out and want to convert your PPOR to an IP you will be in the same position as someone who had a P&I loan.

I'm not saying there is anything wrong with the IO+offset idea, but apart from a small number of situations FAPP I think it's redundant.

John.