An offset account allows you to keep money in an account that is linked to a loan which, dollar for dollar, effectively reduces the balance of the loan for the purpose of calculating interest.
It’s a bit like having a savings account where the interest rate is the same as the loan account. Get it?
For example:
Loan balance = $800,000
Offset balance = $100,000
Interest is calculated on the balance which is not ‘offset’ i.e. $700,000
Here’s what you need to know:
- The purpose of an offset account is to offset interest on debt
- Offset accounts are misunderstood and abused
- An offset account is not a transaction account unless you know what you’re doing
- Every spare dollar you own should be in your offset or loan account
- Offset accounts are far more powerful than savings accounts
- Investment property owners need to be aware of how to maximise their rental income by using an offset
- Smart use of offset accounts can have a huge positive tax impact if you plan to use that equity home to invest
- If you’re paying a lender for a package, and don’t have an offset, get one
Let’s get into it…
Interest is calculated daily and charged monthly. For every dollar you reduce your loan balance, you reduce your interest payable, you pay more off the principle, you get out of debt faster. It’s a crucial discipline.
Seeing an offset account with a balance greater than $100,000 is like, well, I never see it.
Apart from the odd occasion when I meet a unicorn.
Why do these unicorns have large balance? They’re good with their money, they actually want a life without a mortgage, they don’t just dream about becoming Financially Secure, they are doing Financially Secure, they make sacrifices and they understand how to use an offset account.
If you have multiple offsets on the one loan and you give yourself an allowance each payday to live off, then sure, they can function as a transaction account, but most people aren’t this disciplined or structured.
An offset account is there as a primary savings account so within a certain period the balance of the offset equals and eventually exceeds that of the loan balance.
This doesn’t usually happen. Why? Because it’s too bloody easy to spend what’s in the offset. The bank gives you a Visa debit card to make it easy to drain the balance on a regular basis. Cut it up.
I know you’ve got goals, but how goddam hard is it to stick to them? Most of us need a coach of some sort. Seriously.
You’ve got better things to do with your life than pay a mortgage for 20, 30 or 40 years, right?
People are quick to get a personal trainer when they’re feeling fat or pay hundreds for boxing lessons to trim down before a wedding but they won’t part with a few hundred bucks for some financial tuition from their Broker of Accountant. This is stupid.
How to pay off your mortgage quickly is about sound money management and most of us need help with it. Absolutely the same as your weight, health or family or whatever you can think of that’s super important.
Think about this; paying off your property debt just 10 years sooner can save you hundreds of thousands of dollars, but we flinch at paying just a few hundred bucks for money advice?
Even if we paid a grand a year for 20 years and paid our homes off in that time, we’d still be miles ahead.
You think I’ve digressed from the offset conversation, but I haven’t. The main reason why people do so poorly (literally) in this area is they don’t care about it enough to take any real action.
Your money is precious, if you value your time, that is.
Instead of working you could be hanging with the kids, in the sack with your special someone, at the pub, or reading a book beside the pool. What would you rather be doing for the rest of your days?
Keep it in a safe place rather than spanking it on lavish gifts, fine dining, cocktails, holidays and school fees you can’t afford.
What’s the message here? Stop spending, start saving and put it all in your offset.
When the shit hits the fan and you need cash for an emergency (A wedding isn’t an emergency) then it’s there for you to use.
For property investors, the offset account is the tool for flexibility and maximising the tax deductibility of your investment debt.
If you’ve got non-deductible debt (your home loan) and also own an investment property, you can run all of your income through the offset account on your home loan and minimise your interest cost.
Want to see an offset at its MOST POWERFUL?
This is not tax advice, but if you pay into your existing owner-occupied loan directly, then use that equity to purchase a new home with the intention of using the existing home as an investment property, you can’t claim the interest on the new debt created by drawing out the equity and creating new debt in the process. The ATO won’t allow it – They view it as non-deductible debt.
HOWEVER, if you make the minimum repayment but throw money single-mindedly into the offset, you can actually draw the entire balance of the offset out and use it as a deposit on your new pad. The ATO views the ‘equity’ in the offset account as savings.
Guess what?
Every dollar of the resulting loan balance (on the existing property) that wasn’t repaid is deductible if you begin to generate income from that property. I’m not an accountant or a financial adviser, so this is not advice, but the information is available on the ATO website for you to digest.
Do these things to maximise your offset account balance and get it working for you:
- Pay your nerdy accountant a few hundred bucks to set your budget
- Listen when he says you can’t really afford to pay for private schooling, and if you insist, then something else must go
- Speak to me about how to refinance your mortgage with the right structure to maximise your offset balance and get the lowest interest rate and mortgage repayments that will repay the loan faster
- Operate in ‘savings mode’ almost all the time. Don’t overthink it – just stop spending on non-essentials.
- Resist the temptation to keep up with the Joneses or whoever you’re trying to keep up with. You’ll be able to retire earlier and will be more financially secure than them. You will eventually be the Joneses.
- Break old spending habits, i.e. stop spending.
- Remind yourself that the greater your offset balance the richer and more financially secure you are.
- And finally, get financially nerdy – read books and good information about mortgages and money. I can’t say enough about this.
Now, go get to it!