Wondering whether you should have an offset account for your investment property loan? Find out the tax implications with Savvy.
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Many property investors seek the tax advantages that negative gearing can bring, so having an offset account to reduce the interest you pay on your investment property may seem counter-productive. However, the tax implications of an offset account are quite complex, so you can read about the pros and cons of a mortgage offset account for investment property right here with Savvy, as well as compare your finance options.
One of the attractions of buying an investment property is the tax benefits that are to be gained through negative gearing. This means if your investment makes a loss (because the rent you receive doesn’t cover the cost of your investment home loan), you’re able to claim a range of costs associated with your investment as a tax deduction. This is the basis of negative gearing in Australia and means you can claim the interest portion of your investment loan as a tax deduction.
Therefore, in this situation, an investment home loan with an offset account (which is designed to reduce the interest you pay on your loan) may not be the best idea, because it’d reduce the interest you’d pay on your investment loan and therefore reduce the income tax deduction you’re able to claim. This would reduce the effectiveness of your investment property as a legitimate tax reduction vehicle.
As an example, if a borrower has an investment loan of $350,000 on a negatively geared property but has $50,000 in an offset account linked to that loan, they will only pay interest on $300,000, as the remaining sum is offset. Therefore, the amount of interest paid is lower, and so the tax deduction they can claim against their income is reduced, meaning they’ll pay more income tax. You can use Savvy’s income tax calculator to work out how much you’re currently paying according to your taxable income and see how a deduction can make a difference.
There are several ways in which you can best use an offset account with an investment home loan. If your investment property is positively geared (meaning it makes a profit once mortgage payments have been considered), an offset account does make sense. By reducing the interest you pay using an offset account, you may save more money than you would if you housed your savings in a savings account.
Additionally, offset accounts can be important for keeping the purpose of the loan consistent. While interest can be claimed as a deduction on an investment property loan, depositing additional funds and subsequently withdrawing them for another purpose can affect the loan’s purpose and your ability to benefit from tax deductions. An offset account in place of a redraw facility helps to keep everything consistent and avoids this potential pitfall.
Rather than having a mortgage offset account for your investment property, it’s often a better idea to have the offset account linked to the loan for the home you live in. Your residential property mortgage expenses can’t be claimed as a tax deduction or used for negative gearing purposes, so it makes sense to minimise the interest you pay on your home loan, not on your investment property.
As an alternative to an offset account, if you have an investment property with a redraw feature, you may be able to use it to take out a lump sum to either use as a deposit for another investment property or conduct renovations or home improvements (which will impact your loan’s purpose as discussed above). Use Savvy’s lump sum repayment calculator to see how much interest you could save by making a lump sum reduction to your home loan.
You may also be better off choosing or refinancing to an interest-only loan to maximise your tax deductions. If you do get an interest-only loan, the principal sum you borrow will remain constant and won’t reduce, but 100% of your loan interest payments will be tax-deductible. You can continue paying interest-only on your loan as you hold onto the property while house prices rise. When you eventually do decide to sell your property, you can benefit from the higher price you’ll hopefully receive at sale time. This strategy isn’t as effective if you aim to keep your property in the long-term.
You can claim a tax deduction (in the income year you incur the expense) for all investment property expenses including:
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
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© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
We’re partnered with lenders, insurers and other financial institutions who compensate us for business initiated through our website. We earn a commission each time a customer chooses or buys a product advertised on our site, which you can find out more about here, as well as in our credit guide for asset finance. It’s also crucial to read the terms and conditions, Product Disclosure Statement (PDS) or credit guide of our partners before signing up for your chosen product. However, the compensation we receive doesn’t impact the content written and published on our website, as our writing team exercises full editorial independence.
For more information about us and how we conduct our business, you can read our privacy policy and terms of use.
