Offset Accounts and Property

If you have a mortgage on your main residence but your long term plan is to eventually move out of that home and rent it out, then you really should be contacting your bank to arrange an Offset Account for your mortgage.

An Offset account is basically a savings account linked to your home loan where the benefit is that the savings offsets the balance of the debt that you owe, effectively minimising the net debt of which interest is calculated on. It is also a good way of paying down debt without locking away your equity.

The tax advantage to this mortgage structure is two-fold – Firstly, had you put those savings into a general Term Deposit account the interest earned on those savings would be taxed. Instead, by having the savings offset payable interest (which is non-deductible if the property is your main residence) you’re not incurring the income tax on the interest savings.

Secondly, suppose at some future point in time you decide to move out of that residence to purchase a new residence but want to keep it as an investment property. If all of your savings have been built up in an Offset Account you have the option of drawing all of your savings out of the Offset account, using that as your deposit towards your new main residence and the interest that you pay on the new investment property reverts back to being calculated on the original debt level (but conversely your new main residence debt is minimised). By doing this, you are essentially minimising your non-deductible debt and maximising your deductible debt.

This article is general in nature and should not be relied upon in making an investment decision. We strongly recommend you seek financial advice prior to making any investment decisions.

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