My parents have owner occupied and investment property. They have got $200k in savings so trying to figure out best offset approach.
Is it best to keep funds parked in offset account of owner occupied property with low interest rate or move funds into offset account of IP which has significantly higher interest rate. We are talking about difference of around 1.5%.
In terms of taxation, their income fits into 4th tier.
I mean, why would I use a professional service when I can pick the mind of people trying to save money when they buy eneloops?
Cheaper than a financial advisor and we won't charge you fees when you're dead. I think it's a valid choice!
None of the above, I would use the 200k to buy another IP.
the % difference between IP and PPOR property must be > than the income tax bracket % to put in IP
to be honest just put in PPOR
Wait for Nature Strips's next race and tell em' to ALL IN
If ownership is joint tenant and loan taken out together then interest will usually have to be split and calculated for each person individually.
Ask their accountant.
If this gather information for their accountant, get a new accountant.
Buy the dip
Hummus or guacamole?
Taramasalata. On special in Aldi at the moment
Why this is even been a question, investment loan interest is tax deductible and owner property don't.
Their accountant is Ozb too?
Because you might save more money reducing interest than just having extra interest reducing your tax bill.
Eg. Say you are earning $100k. You pay $24,967 total tax per year
Say you owe $500k on your investment and 500k on your PPOR. Say the interest rate is 6.25% on the investment property, and the interest rate on your PPOR is 4%.
If you put the $200k in your PPOR so you can have as much tax deductible as possible you are taxed on 100k-31,007.21=68,992.79 which means your tax paid is $14,270. The interest paid on $300k at 4% is $11,870.19.
Total paid out in tax and interest = $14,270+$31,007.21+$11,870.19=$57,147.40
If you put the $200k in the investment mortgage, instead you pay $18,604 in interest, taxable income is $100k-$18,604=$81,396, so tax paid is $18,549. Interest on the PPOR is $19,783.65.
Total paid out in tax and interest =
$18,604 + $18,549 + $19,783.65 = $56,936.65
Benefit by putting the $200k in the investment property is 57147.40-56936.65=$210.75
Interestingly the benefit was the other way to start with when I chose 5% as the PPOR interest rate. Without doing a whole spreadsheet I would guess the balance is when the difference is around 1.75 percentage points (at least for the salary and the amount owed that I picked). I would need to know the amount owed and the salary to tell OP which option is better for their parents. But it is definitely not the answer to always put the money in the PPOR just because of tax deductibility.
Only their accountant know the answer, hence I ask, OP parents using the Ozb accountant as well 😉
Maybe talk to a financial adviser as well (Ozb good at that too)
Every person's circumstance are different.
If I'm OPs parents, I would buy a nice car and travel a bit. Time to enjoy.
Excellent detail, thanks!
I guess yet another factor is if the reduced deductable interest would push them into a higher tax bracket.
Take advantage of NG.
It is almost always better to put against PPOR. The differentials necessary to make the alternative superior are all but impossible to achieve in practice.
All but impossible? All you need is a calculator.
Yes … and will the variables in that calculation necessary to make the PPOR option inferior ever be observed in practice?
Yes, you just need a big enough difference in the interest rate between the two, which you can figure out with a calculator.
@Quantumcat: I understand that. What I'm attempting to say is that differential is almost impossible to observe in a practical sense … the differential is so large that you would need to find some extreme edge case to find someone who is in that circumstance, e.g. they have a discounted PPOR rate and effectively usury rates on the IP.
I currently have my savings in an offset against my investment property rather than my PPOR - but only because Athena's offset account is so crap. If they ever get it to full functionality, I'll swap.
If you are using the offset account for your spending, then you shouldnt put it in IP, we were in the same situation and the accountant said its a nono from the ATO. on the off chance that they audit , it could get messy if its long term, although how they are going to count the daily differences might be not worth pursuing lol
You may want to double check your understanding with the accountant. You shouldn't put it on your mortgage and then take these proceeds out to use personally. This gets messy. The offset is a different account to your loan.
When we did our taxes for last FY, the accountant basically told us that if you are going to be using funds from the offset, never put it against the IP, as it can 'potentially' get messy with ATO as the interest rates are counted daily something something (mostly went over my head lol). So if you are not touching it then it should be ok, but its better to put it in PPOR as the interest charges against IP is tax deductible anyway?
It is a jungle!
Oz has 6 digit BSB's so the options come and go!
Op you give the difference in interest rate but not the actual interest rates which is required to answer correctly. Also I assume full offset not partial.
I am really concerned by people's understanding of interest, tax and maths. Given the OP is in the 4th tax bracket ie 39% inc Medicare (I am going to assume no loading or changes in tax brackets). They are effectively paying 61% of the interest on the investment property. As per my opening comment given we don't know actual interest rates on the loan and I am going to give 2 assumptions that gives different outcomes.
Assume 4.5% investment and 3% owner occ. 4.5%X61% = 2.745% is the after tax interest rate vs 3% owner occ. In this case it is slightly better to apply the offset to the owner occ.
Assume 3.5% investment and 2% owner occ 3.5%X61% = 2.153% is the after tax interest rate vs 2% owner occ. In this case it is slightly better to apply the offset to the investment loan.
Are they really going to pick their strategy based off the top voted option on an Ozbargain poll?