Offset Accounts for Property Investors

Friday 10 Apr 2015 Written by: Kathleen Aoki for Bankwest

If you’re planning to invest in property, it’s important to choose the right home loan.We sat down with Paul Vivian, Bankwest’s General Manager of Products and Pricing, to talk about the pros and cons of using an offset account for your investment property.

THE BENEFITS OF USING AN OFFSET ACCOUNT

An offset account is a loan feature that can potentially help you save money on interest by ‘offsetting’ the amount you owe on your mortgage with the funds in your bank account.

So how does it work?

Vivian gave us the following example. Let’s say you take out a $450,000 mortgage at 5% interest per annum for 30 years. If you were to put $50,000 in an offset account, you’d only have to pay interest on $400,000 – not $450,000 – saving you more than $139,000 in interest and reducing your loan term by nearly five years.

An Offset Account Can Be A Good Option If You’re A Disciplined Saver.

“Because the interest rate on your mortgage is generally higher than what you can earn in a savings account, an offset account can be a great option if you have cash to set aside, such as rent paid by tenants,” says Vivian.

“It can work if you are a disciplined saver wanting to pay down your loan faster, while still having access to the savings sitting in the offset facility.”

And there can be more benefits for property investors, says Vivian.

Investors may be able to claim a tax deduction for interest paid on their investment property loan if it is clear that the loan’s purpose is specifically to fund the investment property.

Investors could inadvertently change the loan’s purpose if they deposited additional funds into their mortgage to reduce interest payments, then later withdrew those extra funds for another use.

With an offset account, deposits and withdrawals can be made without the purpose of the loan being affected. Vivian notes however that investors should always get their own independent tax advice before proceeding with an offset account in the above circumstances.

The goal of many investors is to maximise the interest charged to their investment loan, in turn maximising their tax deduction. These investors often use an offset account to reduce the interest charged to their owner-occupied loan, which isn’t tax deductible.

Offset Accounts Offer Attractive Benefits To Property Investors.

WHEN NOT TO USE TO AN OFFSET ACCOUNT

“Offset accounts offer attractive benefits to property investors,” says Vivian, “but bear in mind that 100% offset accounts are usually only available for variable-rate loans, which sometimes come with higher rates than fixed-rate loans.”

“So unless you have enough savings, or are able to keep a high intermittent amount in your offset account, the higher interest rate associated with a variable-rate loan may outweigh the potential interest and tax savings.”

There can be a number of reasons why an investor may choose a variable rate over a fixed-rate home loan (aside from the availability of an offset facility), so it’s important to consider your individual financial circumstances.

Vivian notes that there may be instances where making extra repayments directly off the balance of your loan may be a better option than an offset account; for example, if you want to increase the equity in your home. 

IS AN OFFSET ACCOUNT RIGHT FOR YOU?

When deciding if a loan with an offset account is right for your situation, Vivian suggests considering the following questions:

• Do I have a significant portion of the mortgage balance to set aside in an offset account?
• Is the interest rate on my mortgage higher than what I could earn on my money elsewhere?

If the answer to these questions is yes, then an offset account could be the right option to help you achieve your investment goals. The good news is that an offset account functions like an everyday transaction account, allowing you to deposit and withdraw funds as needed. And because loan interest is calculated daily, many investors deposit their wages directly into their offset accounts, allowing them to immediately save on interest, even if they use the money to pay bills later.

Many Investors Deposit Their Wages Directly Into Their Offset Accounts.

While an offset account can offer many financial benefits to property investors, Vivian recommends weighing the pros and cons carefully and consulting a trusted financial advisor to decide if an offset account is the right choice for you. 

To the extent permitted by law, Bankwest, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL/Australian credit licence 234945, its related bodies corporate, employees and contractors accepts no liability or responsibility to any persons for any loss which may be incurred or suffered as a result of acting on or refraining from acting as a result of anything contained in this report.