Hi there
I can't work this one out! I've been thinking it over the last 2 days
Which is better
10k To offset my mortgage on my investment property which is currently sitting at 1.99% interest
Or
10k into Bank of Queensland high interest Savings account at 3% interest
I will have to pay tax on the 3% via BOQ or going with offset I will have less of a deduction on my investment property as my expenses are less
Assuming my tax rate is 37%
I'm very curious on your responses
One receives a tax benefit. The other is taxed. Makes sense to earn the 3% in that instance…
The offset is better between the two to avoid taxes and zero devaluing by inflation.
Sounds like offset is better
Otherwise you're paying 37% on the 3% which works out less than 2%
Yes you are correct however if I offset, my expenses are less which means I have less of a deduction on my earnings so I am still effectively still being taxed?
Not reducing debts means the $10,000 at 37% translates to a $3,700 tax saving.
Putting $10,000 @ 3% is $3,000. Less tax of 37% leaves $1,890
I’d be keeping the tax saving and earning the extra $1,890 personally…
Putting $10,000 @ 3% is $3,000.
Brb, putting all my cash into your savings account.
iPhone rogue zeros 🤦🏽♂️
i'm perplexed by these figures.
Same. My bad
Mskeggs where are you?
If you put money into the savings account. You therefore pay extra interest on the loan ($10k at 2% pa = $200), which is tax deductible at 37% = actual interest paid of $126. Puts money into savings account and earns 3% ($300) which is taxed at 37% = $189. Net is $189 (interest earnt) - 126 (interest paid) = $63 (Or, more simply, you earn $300 interest and pay $200 in interest, so net $100 gain. Which is taxed at 37% = net $63)
The other way around is put money in offset account which saves $200 in interest paid, which is net $126 after tax as above
So the offset benefits you by $63 (offset benefits you by $126, savings account benefits you by $63)
Which is obviously a trivial amount so whatever.
However here is the more important figure. Every extra dollar you pay off the principal of your mortgage now will save you interest in the future. Even if you maintain your current interest rate, if you continue to pay the same repayment (ie including the $200 interest that you now dont have to pay, so it comes off the principal), on a $400k loan over 25 years at 1.99%, that extra $200 per year will save you $1000 in interest over the life of the loan. At 3.99% it will save you $2500 (obviously figures will change depending on how much you have borrowed and the life of the loan. Also these are pre tax figures so take off 37%. Do your own calculations eg at https://www.ing.com.au/home-loans/calculators/extra-loan-rep… )
edit: yes, I rounded 1.99% to 2%, it doesnt really matter
Respectfully (I'm very appreciative) I think your math is wrong
Why you need to take account 37% tax rate on offset? I thought it was the full $200 benefit without getting taxed.
Because it is an investment property loan.
The interest is deductible against the investment income. So let's say the income (rent) of the investment properly is $10,000, the interest paid on the property is $2k, you make a profit of $8k that's taxable (which at 37% is $2960)
If you reduce the interest being paid by reducing the loan by $200, suddenly the profit is $8,200 and you're paying more tax on that ($3,034). Not really being taxed on the interest saved, but the fact the profit is higher on the investment as a result.
The numbers we are talking about are incredibly small.
Either $199 in interest savings or $189 in net income earned.
By not putting 10k in IP means you don’t lower your annual taxable income by $199. After tax, you are out pocket $199 x (100% - 37% - 2%) = $121.39.
10k in savings means you gain $304ish before tax. So after tax you gain $185.44
By putting money in saving account, you’re better off $185.44 - $121.39 = $64.05 after tax
Edit: similar to dtc above comment, except include medicare levy
Yes my math agrees it seems I would be better off with putting it in a savings account. DTC seems to disagree?
Dtc first and second paragraphs are correct. The third paragraph should read
So the offset
benefitscosts you by $63 (offset benefits you by $126, savings account benefits you by$63$189)
You need to watch out the saving interests earned up your taxable income, which can have effect on medicare levy surcharge and other tax.
Thank you very much! You are the bees knees
I will go ahead and move it to a Savings account
I feel like there will be alot of people in a similar position, who for as long as ever assume it is better to offset. I believe it is no longer the case
@Dr Cheapo: Usually always better to offset if it is a PPOR and always better in savings/other investment if it is an investment property.
I have a small question, let's say if one got 10000 home loan for 30 years, but within 5 years, 10000 was deposited to the offset account, so what will happen for the rest of 25 years
? no interest and only principle will be paid monthly ?
yes, and minimum repayments decrease pretty rapidly, to the point your last 1 year would be like 1c a month
you can offset a loan 100% and never look at it again assuming no annual fees etc
thanks a lot, never knew that
for PPOR :
1.99% / (1 - .37) = interest rate needed to beat offset = ~3.15%
given the interest rate may rise above 3% in a savings account / you may become unemployed thus no tax on earnings, id stick with savings account.
if you remain employed and lose out slightly, then least you had the benefit of employment income.
for 10k in offset save $199,
for 10k in savings, you save $189 after37% taxation applied
diff of $10
for INVESTMENT
since both are taxed at the same rate, the taxation is irrelevant, and savings account clearly wins. I.e the interest charged on the loan is an expense.
so 1.01% @ 10k = ~$100
for both options, id go with savings just for the employment factor
consider this option, open a term deposit post june 30, around 3% and have it paid out the next FY, again just incase employment ceases its a nice big boost of income, and also saves you having to do all the saving account b.s. to get the bonus
If you have a partner or child who don't work then put it in the savings account under their name to save on tax.
Not sure why downvoted this is great advice
1+1=2
If you earn interest you pay 37% tax on it. If you reduce your expenses you pay 37% tax on whatever you reduce it by. It's that simple.
Go with the 3%, it's a bigger number than 1.99%.
In this market/impending recession i'd be eradicating as much debt as possible.