Should you offset your investment property or put it into savings?
If you've paid off your primary residence and are fortunate enough to have some extra cash, you may be wondering whether to place those funds into an offset account linked to your investment property or into a savings account. Both options have their advantages, but the right choice depends on your financial goals, tax situation, and overall investment strategy.
Understanding the options
Offset account
An offset account is a savings or transaction account linked to your mortgage. The balance in this account reduces the amount of interest you pay on your loan. For example, if you have a $400,000 mortgage and $50,000 in an offset account, you'll only pay interest on $350,000.
Benefits of an offset account:
- Interest savings: You effectively earn interest at the mortgage rate, which is often higher than savings account rates.
- Tax advantages: Interest saved is not considered taxable income, unlike earnings from a savings account.
- Flexibility: Funds can be accessed at any time without penalties.
Considerations:
- May not maximise your returns if the property loan interest rate is lower than potential investment returns elsewhere.
- Reduces tax-deductible interest on an investment property loan, which can impact your tax strategy.
Savings account
A high-interest savings account allows you to earn interest on your cash without tying it to your mortgage.
Benefits of a savings account:
- Liquidity: Easy access to funds without impacting your loan structure.
- Potential Higher Returns: If market rates or investment returns are higher than your mortgage interest rate, savings accounts or other investments may offer better returns.
- No Impact on Tax Deductions: Keeping the loan balance high maximises the tax-deductible interest on an investment property.
Considerations:
- Interest earned is taxable income.
- Savings account interest rates are often lower than mortgage rates.
- Market fluctuations can impact returns if you invest the money elsewhere.
Factors to consider
- Interest rate comparison: Compare your investment property loan interest rate with the interest rate of a high-yield savings account or other low-risk investments.
- Tax implications: If your investment property generates income, reducing the deductible interest may increase your taxable income. Seek professional tax advice to calculate the impact.
- Long-term goals: If you plan to pay down the loan faster, an offset account can help you become debt-free sooner. However, if you're building wealth, investing elsewhere may yield higher returns.
- Emergency fund: Keeping some money in a savings account ensures liquidity for unexpected expenses.
Both offset accounts and savings accounts have their merits, but the best choice depends on your individual circumstances. If minimising interest and preserving cash flow is your priority, an offset account may be the way to go. However, if you're aiming to maximise investment returns and maintain tax-deductible debt, a savings account or other investments could offer greater long-term benefits.
Consulting with a financial advisor will help you align your decision with your broader financial goals, tax position, and risk tolerance.
