If I got some $$, is it better to invest on term deposit and enjoy the tax benefits from the investment loan or put it on a investment loan as off set account ?
EDIT - Thanks all !! !!
OzB Financial Advice on Investment Offset Vs Term Deposit
boomramada on 26/07/2023 - 18:29
Last edited 26/07/2023 - 20:21
Last edited 26/07/2023 - 20:21
Comments
That's what I want to know, how to calculate.
If the tax rate is 37%
Fix rate is 4.75%
Loan rate is 6% for example, how do I work that out?
Say 100K to invest.
- Investment offset generates $6000 less interest. So it's $6000 less you can claim in your tax returns. Whether this is good or not, depends on your taxable income and how much you earn from rent.
- Term Deposit earns 4.75% less 37% tax, so effectively earns 2.99% i.e. $2990With a taxable income you are always better with offset since you dont pay tax on your debt
Term deposit - interest rate, less tax on interest.
Investment loan - reduction in interest on investment loan, less offsetting interest cost on tax
One you'll be paying tax on the interest, the other you'll be offsetting less interest costs against investment earnings
Im expecting your investment loan has a higher interest rate.
Pick the one with the highest interest.
So putting in the investment loan is better? Even if you put in a term deposit, I be still have to pay tax on the interests I guess.
The tax makes no difference in this case. It would only make a difference if it was your PPOR mortgage because in that case the investment returns (less interest payable) aren't taxed because they are "expenses saved" rather than "income".
With your investment loan, you will also need to take negative gearing into consideration.
Assuming you have a $500k investment loan (adjust as required).
Assuming you have $100k cash to put to work (adjust as required)
You have 2 possible scenarios:Scenario 1 (Term Deposit)
- $100k cash @ 4.75% = $4,750 less 37% tax = $2,992.50 after tax interest
- $500k investment loan @ 6% = -$30,000 interest expense, less tax claimed as expense @ 37% = -$18,900
* So at the end of the year you will be -$15,907.50 out of pocket for the year ($2,992.50 - $18,900)Scenario 2 (Investment Loan)
- $400k investment loan @ 6% = $24,000 interest expense, less tax claimed as expense @ 37% = -$15,120
*So at the end of the year you will be -$15,120 out of pocket for the yearPutting the cash into the investment loan works out to be $787.50 better, based on my assumed data.
offset any day of the week.
With tax and term deposits you'll always lose out.How much research have you done so far ?
What is the Term Deposit Interest rate, the investment loan interest rate and your tax bracket?
Not financial advice, but you need to run the numbers. If you got the $$.