Big savings in offset accounts
EVEN though offset accounts are one of the most useful investment tools you can have, very few people understand them.
If you deposit money in a normal account you will probably earn less than 2% per annum and then lose nearly half of that in tax. However, when you deposit your money in an offset account the notional interest credited should be the same as that charged on the housing loan.
But it gets even better; instead of being credited to your account and leaving you liable for tax, it is taken off the interest on your non deductible home loan. Therefore funds in an offset account earn you the equivalent of the loan rate (currently around 7%) after tax. That's equivalent of getting 12% before tax on an interest bearing deposit.
You can put offset accounts to good use if you intend to change residences and retain the old one.
Think about two neighbours who started with a housing loan of $300,000 some years ago. One used all their resources into reducing the loan while the other poured all their money into the offset account. Today, the first owes only $80,000 on their loan but the other has a debt of $290,000 with $210,000 in the offset account. They both decide to upgrade to another residence, but want to keep the old one as a rental.
The second couple would be much better off for tax purposes as they can simply withdraw $210,000 from the offset account to use as a deposit on the new home, leaving a deductible debt to $290,00 on the existing one. In contrast the other couple will be paying tax on the rents from the original property and suffering the burden of a huge non-deductible debt on their new home.
Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is firstname.lastname@example.org. Or follow him on Twitter @NoelWhittaker.