In my time I have seen the wrong loan structure on numerous occasions. Some simple advice and strategy to think ahead could save you thousands.
An ordinary home loan consists of an amount of money borrowed, typically over thirty years that you gradually pay back over time. If you have made extra repayments, most facilities have redraw. This will allow you to access your extra repayments anytime. Usually a basic home loan has the cheapest interest rate and cost is all we focus on.
A mortgage with an offset account usually attracts a slightly higher interest rate. Not always as these days you can usually negotiate a better rate depending on your loan amount. The way in which this facility works is your original loan amount remains the same, and the extra funds and repayments will come out of the offset account. The bank will charge you interest on the balance of the loan amount, minus the funds in the offset.
The advantages of having a mortgage with an offset are that it will allow you to have more options in the future. As an example:
Home Loan Scenario: John & Tanya have a normal home loan (no offset) of $500,000. They work very hard and pay most of their loan off. Their current balance is $100,000. They have access to $400,000 in redraw. They wish to upgrade to a bigger house and decide to keep their existing property as a rental property. The issue is as soon as they redraw the $400,000 out to purchase the new property, by law only $100,000 is tax deductible. That means the rental property will be positively geared and the non-deductible debt will be $400,000 higher on the new property. This is not a good situation to be in and eventually you will probably decide to sell the rental property due to the mismanagement of the initial loan.
Offset Account Scenario: John & Tanya have an home loan with an offset account. The original loan is $500,000. Over time they pay $400,000 into the offset account. Therefore the bank is only charging them interest on $100,000. They decide to upgrade their house and wish to keep their existing property as a rental. John and Tanya are able to redraw $400,000 from their offset and contribute that towards their new property. The rental property loan will now be $500,000 and they can claim the interest on this against the rental income they will receive. The reason why this is allowed is that according to the ATO they have not changed the original loan in any way. This is because the loan and the Offset account are two separate accounts. John & Tanya are now living in their new home and have a negatively geared property which is working for them come tax time.
As you can see the two scenarios have a huge impact on the end result. So it’s important to make sure your structure and advice is right so you are able to achieve your goals.