If you are lucky enough to have come to that point in life where you have paid off your private mortgage you may now be looking at paying down some investment loans. There are a number of factors you need to consider to ensure you get your excess cash working for you in the best way possible.
You may or may not be intending to increase your investment portfolio in the future so you may need to ensure you have as much flexibility with you cash as possible. This is where you will find an offset account to be ideal.
An offset account is a bank account that is linked to your loan account. The cash balance of the offset account affects the amount of interest charged by the bank each month. So, if you have a $500,000 loan and an offset account with $100,000 cash the bank will use the net balance of $400,000 when calculating your monthly interest charge.
Using an offset account is different to using excess funds to pay down your loans but has a similar effect. When you pay down your loan you are typically able to access this as redraw, however, if you redraw to pay for an overseas trip (or some other personal expense) the interest on that portion of you loan is no longer tax deductible. This is because the ATO look at the purpose of the borrowed funds, not the security. The consequences of this can be significant especially as many brokers and advisors are not fully aware of the tax consequences of redraw.
If you have deposited your excess funds into your offset account, when you draw money out to go on that holiday (or buy that car etc) you are not actually affecting the loan at all, you are just drawing money from your bank account. This will increase your interest based on the example above, but the loan account balance will not change.
We have an excellent in-house mortgage broker, Linda Hamilton. Please do not hesitate to contact Linda should you require an additional information.
If you have any other questions about structures or investments please contact our office on 03 8393 1000.
Rebecca Mackie, Partner, Paris Financial
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