17 November, 2020 / IN Tax and accounting / by Chad Nean
For many people reducing their home loan and ‘bad debt’ is a great strategy and something that I highly recommend.
Paying off your home loan is a relatively risk-free, tax-free strategy that allows financial freedom and choice in the future. Furthermore, it can create a great platform for future investments, along with taking a lot of stress and worry out of your life. You only need to look at the recent COVID-19 issues with loss of work, resulting in pressure on freezing home loans and worry surrounding this for many families.
However, it is important to consider doing the above in a tax-effective and flexible way to give you choice with your property and its future use. One way to achieve this is the use of an offset facility alongside your home loan.
An offset account is a normal transactional account that is linked to your home loan. You can make deposits and withdrawals as needed, however, the big difference is that when you hold money in this account over time it reduces the amount of interest charged on your home loan.
An Offset Account Example
By way of example, and I see this regularly, consider a young couple who start off in a smaller property (unit or townhouse) and look to pay down their home loan thinking that is the right thing to do financially. Over time, the family looks to grow and their property is no longer suitable for their needs. However, they wish to keep the existing property as a future investment.
The issue with this is that a lot of the equity they have created is now trapped in this property. This will result in potentially a smaller investment loan but they’ll need to borrow a larger non-deductible personal home loan for their new larger home. Or worse, they may be forced to sell their existing property to release the equity to allow the new family home to be purchased.
If however an offset account was used so that the initial home loan was paid down with minimum monthly repayments while utilising the offset for surplus funds, then these funds could be used to help purchase the new home.
In that scenario, let’s assume the client’s original home was purchased for $300,000 and after minimal repayments were made off the loan $200,000 was able to accumulate in the offset account. The client would only be paying interest on the net $100,000 balance but importantly would be able to take their $200,0000 out of the offset account to help purchase the new home, whilst leaving the full unpaid balance of the original loan in place. This original loan would now become tax-deductible.
Therefore, this smarter approach has allowed flexibility for the future and has resulted in interest savings along the way.
How We Can Help
It is important to plan early with your loan to allow flexibility for the future.
If you would like to talk to someone on how to utilise your offset account to your advantage, please contact Chad Nean or Jye Smith on 02 4969 6600 or using the form below and we can arrange a complimentary initial discussion with you.