Many clients are now opting for lower rates and fee free loans, usually this is a basic product offering and will not have access to an offset account. While this may suit clients in their specific circumstances, we need to remember a few benefits of offset accounts. The most commonly known benefit of an offset account is that it offsets your interest. An example of this is if you have a $500,000 loan limit and your currently hold $100,000 in your offset account, then you will only pay interest on the $400,000 as the $100,000 offset the interest component. So, you may be able to save a great deal by holding funds in your offset account, offsetting your interest and therefore not paying unnecessary interest. It is important to note that while you funds are offsetting your loan in an offset account you do not earn interest on your funds in the offset account. Once again you are saving but not paying interest as opposed to earning money by accruing interest. The offset account is fully transactible at most lenders allowing your repayments to be made from the offset account, salary to be paid directly in to the offset account, bills to be paid from the offset account and money transferred from in to the offset account.
Now many clients without an offset account can simply reduce their interest cost by paying funds directly in the loan reducing the balance and the interest cost. This is called paying down you loan or using your Redraw facility. However, a key benefit of an offset account that is not as widely known or understood is that it allows you to reduce your interest cost without paying down your loan balance. Why is this a benefit? Well it is a potential tax benefit in the future. Essentially, if you pay funds into your redraw you have paid down you loan and if you draw those funds back out of redraw then you have effectively using those newly drawn funds for a fresh purpose changing the purpose of the loan to whatever those funds are used for. If you draw funds back out of your redraw to invest in an asset, then the portion of the loan your drew those funds from may become tax deductible. But if you use those funds for non-investment purposes then the portion of the loan your drew the funds from would probably not be tax deductible. Similarly, if you pay funds into an investment loan as an example $100,000 into a $500,000 investment loan, then draw those funds back out to use for non-investment purposes, that may actually make that $100,000 portion of your investment loan no longer tax deductible. So, a way to protect your lending and the purpose it was used for is to have an offset account and not use the redraw facility. Now to be clear this is not advice and I am not an accountant, so please talk to your accountant in regards to this to confirm their understanding and clarify your own understanding.
If you would like to discuss this tip or anything to do with your plans to borrow more funds or find a better deal on you current lending, please feel free to email myself directly on firstname.lastname@example.org or contact us at Lendtribe.com.au.
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