When choosing a variable-rate loan, remember that the right loan will offer a combination of flexibility and convenience as well as competitive rates and fees. Of course, everyone has different needs and specific financial goals.

Read the full article from realestate.com.au to find out more.

Speak to CPS Finance to find the right variable loan for you.

I’m confused – my bank teller is telling me to transfer my savings onto my mortgage but you are encouraging me to leave the money in my offset account. Isn’t the end result the same? Why am I being told something different from the bank?

Great question!

Besides the obvious answer that the banks would prefer the security of having your savings paying off the money they have lent you, most home owners understand that regardless of the approach you adopt, interest on your home loan is calculated on the same basis. Some believe the only difference between paying off your home loan account and placing your savings in an offset account is the flexibility of having easier access to your savings by having it sitting in your offset account. This flexibility of instant access however, is negated if you have a redraw facility on your loan account.

While the interest savings are the same, there may be very different tax considerations, particularly if the property is for investment purposes or going to be used as an investment in the future. Just because the loan is secured by an investment property, it does not mean that all interest payments are deductible for tax purposes if you redraw on the facility.

Your ability to claim a tax deduction for interest on the total loan is determined by the purpose of use of the borrowed funds.

By way of example… Let’s say you purchase an investment property and obtain an initial loan of $300,000. You then create savings over time of $30,000.

Redraw facility

If you paid the $30,000 off the loan balance (reducing the original loan to $270,000) then later redraw the $30,000 to buy a new car (increasing the loan back to $300,000), you would only be able to claim a deduction for interest on $270,000 as the $30,000 would be deemed to have been used to purchase the car (not a taxable item). This can create accounting nightmares at tax time.

Offset accounts

If you had, however, paid the $30,000 into the offset account, you will have obtained the interest savings by paying interest on the $270,000 balance. When you later withdraw the amount from the offset account to buy the car, the initial loan balance would have remained untouched and all interest would still be deductible as the total loan was used for the purchase of the investment property.

Maintaining flexibility on your home

This situation also applies to your home. In many instances you will sell your family home to buy a new one. If however you want to keep your family home for investment purposes at a later date and you have paid down the original loan rather than putting your savings into an offset account, you will potentially lose valuable tax deductions. As the financial impacts are the same, placing your savings into an offset account preserves your options into the unknown future. For example, if you know in advance as a first home owner that you will be upgrading your unit to a home in the future and plan on keeping the unit as an investment, it is of particular importance to protect your future tax deductibility while maintaining maximum home ownership. It all relies on the structure of your loan and future flexibility – something that most lending institution employees don’t understand. I hope that answers your question.

What is an offset account?

An offset account is a type of transaction account that can be linked to your home or investment loan to save you money on interest. It is used to reduce the interest you owe on your mortgage by offsetting the credit balance of your transaction account daily against your outstanding loan balance.

How an offset account works

A customer takes out a $500,000 mortgage at 5% interest per annum over 30 years. They decide to put $50,000 in an offset account. As $50,000 is now in this account, the interest is now calculated on $450,000, rather than $500,000. This customer will therefore save $142,211 and will also reduce the loan term by 4 years and 3 months.

It is great for savers as any extra cash you have left over from your wage each month can be put into this account to help reduce your interest even further. You could even put the rent you receive from tenants into this account.

Benefit of an offset account

One major benefit of having an offset account is that it allows you to pay down your mortgage faster so you end up paying less interest in the long run, which is especially ideal on an owner occupied home. It also acts as a transactional account enabling you to deposit as well as withdraw money allowing you to have access to your savings if you require them. This can allow you to move quickly on the purchase of another property if the right deal comes along.

Disadvantages of an offset account

As well as benefits, there are also some disadvantages which you should bear in mind before proceeding. These include:

• It might have an account-keeping fee attached to it.
• It might have higher interest rates or fees compared to a basic home loan.
• A partial offset account only offsets a percentage of the balance whilst a 100% offset account will offset the full amount, but is usually only available for variable-rate loans.

Should you have an offset account?

So should a property investor use an offset account? Deciding on whether to have this type of account or not will ultimately depend on your situation. If you know you are a good saver and have a large sum of money that you can put aside then this option could be right for you. By leaving your money untouched for longer this will help lower your home loan repayments each month and the overall interest you will have to pay.

Before proceeding with an offset account it is important to seek expert independent advice first to know exactly what you can and cannot do. You should also shop around to find the best option to suit you.

Want to find out whether an offset account will work for you? Talk to CPS Finance to discuss your options.