I have been putting money in my offset to reduce the interest charged on my mortgage as much as i can. So i have been getting a guaranteed return on my money of about 2.7% which is the rate of my mortgage. I'm thinking of perhaps moving that money to a vanguard fund, but not entirely sure how it works. Is this a worthwhile consideration?
Stack money in Offset or put it in a vanguard fund
Gobi2020 on 07/12/2020 - 16:53
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The short answer is it is worth considering. You need to be prepared to lose some money if the wind doesn't blow in your favour, or you urgently need to withdraw; think about investing in tax effective manner etc.
Don't know your circumstances to give you more examples to consider.
The vanguard fund is likely going to invest your money in a mixture of shares and bonds. How many depends on the fund name.
So i have been getting a guaranteed return on my money of about 2.7% which is the rate of my mortgage
Get a better mortgage rate. Or fix it for 12 month at 2.19/2.29% and have 9 months of mortgage payments as savings.
Buy Australian index VAS and it is paying dividend of 2.55%
By pl8 pays fully frank dividend circa 4 percent, pays monthly and invests in pretty much the same crap.
Because to pay more than the index you are:
- To beat the index (dividends) then you need to actively manage and most managers don't consistently beat the index
- If manager needs to take a fee then strategy needs to be higher risk
- Latest assets for PL8 is $1.03 or $1.05 depends on before or after tax but the share price is $1.12 therefore you are paying more than it is worth. You hope the manager is consistent out performing which most of the time doesn't happen
I don't make individual stock recommendations because people might not understand the share concentration and manager risk involved.
Paid consistently for me, public obviously value it at 1.12 the price has always been above the Nta, why I don’t know but it’s always been 10 percent above, even with that posted in plain view for any investor to see, it’s a handsome payment every month.
@Donaldhump: Just had a quick look.
Maybe the other similar fund would be WLE which has a 4.8% dividend not paid monthly. Looking at 5 year chart looks like most of the capital gain is realised and paid out in dividends.
You need to also factor this:
The money you save due to your offset is not income, so it is not taxed.
Distributions from ETFs are income, so they are taxed.
If your tax rate is 35%, that means you need to earn roughly 4.15% in distributions to break even (compared to 2.7 from offset).
You can redraw from your loan for investment purposes to make this tax deductible, but you need to be very deliberate here - see an accountant etc.
This calculation confuses me. Can you please walk me through what you mean? Where is the roughly 4.15% coming from?
He reverse calculated this.
4.15% gross earnings X (100% - 35% tax rate) = 2.7% after tax earning
If you put $100 into an ETF and it pays you say $5 over the year (5%) and if your tax threshold is 35%, then your take home is 65% (100-35) of the $5. Do similar math for your mortgage interest and the etf growth so you break even.
Essentially the take home from your ETF investment must be more than what your offset generates in a year. Only then you're better off by investing the money. Clearer?
If you borrow to invest the interest is tax deductible. You just have to very good at book keeping.
So i have been getting a guaranteed return on my money of about 2.7% which is the rate of my mortgage.
Don't forget that is not taxed…
But it is not income either, even if the OP thinks it is. There's a significant difference between income and paying less interest.
jv has a point, in comparing the overall wealth effect.
Mechanics can be different, like discount on sales vs cashback
everyone is thinking / doing this, and thus stocks going up.
my loan is now fixed at 1.99% so i am pumping it inti shares…. 1.99% is a joke1.99% is a joke
On the savers that is. Never has money been this cheap to invest. Leaving it in bank account, mortgages, non productive assets (cars etc) is dead money
yep savers r getting shat on atm
All depends on. how comfortable you are with risk.
Offset = no risk and guaranteed return of X% depending on your interest rate.
Vanguard = Higher risk of either making more than your current interest rate or loosing your investment if the market goes down.
Personally I'd do both at 50% to cover both grounds.
only suggestion i would make, is if you have $X invest x/12 every month for a year to DCA a bit.
ie. if 60k in offset why not just do $5000 a month for 12 months
All on black bruv
safe use of funds to pay down debt. add back your tax rate to get the real gross return before tax. useful for redraw when you get into a fix and need to defer payments.
Also interested in the answer of OP question!