Just a quick tip for today.

Recently, we’ve seen a few people declaring large amounts of interest or paying down their own home loan with excess cash. Neither of these ideas are necessarily ‘wrong’, per se, but often there is a better way to do things.

Paying down the debt against your principal place of residence certainly provides options. Lower LVR, more security, and generally regarded as quite a sensible thing to do. The main issue here comes about if you get to the point where you’d rather move into a new home, and rent out the old one. If you’ve already paid down the debt, then any redraw to purchase a new home will be considered private in nature and thus the debt; non-deductible.

However, using an offset account will have much the same affect in reducing interest, yet redraws from an offset account will not change the nature of the underlying loan. That allows for the opportunity to take cash out of the offset to put into a new PPOR, and the entire amount of interest on the previous home may then be deductible as investment-related debt. Clearly, a much better situation to be in.

With regard to savings accounts, the main drawback here is that interest earned is considered taxable income. However, interest saved on private debt using an offset account; isn’t. And, in most cases, the interest saved will usually be much higher than the interest earned – even before tax.

So, it might be worth looking at how your banking is set up. And just shout if you’d like to be pointed in the direction of a good broker, too.