Offset Mortgages

[Toasty]

My last topic attracted all sorts of good advice so heres another one.

Does anyone use offset accounts against their mortgages? I run a BNZ Total money account against my property company. One of the accounts is the working account but also in the account group I have dumped the kids education fund, a Family trust account, and a another account which is just a cash dumping ground for anything I have lying around. In this particular case I have a $340k loan but I am only paying interest on about $140k due to the offsetting.

My questions are whether this is a valid strategy and if anyone knows of the tax implications? To me it means I have the effectiveness of a revolving credit without the concern that the bank could shut it down.

I was going to ask my accountant but as soon as I open my mouth to ask questions he usually stuffs an invoice in it.

[TheLiberalLeft]

Depends. They reduce the interest, so reduce your claimables against other income. However they also reduce expenses (interest) so if cashflow is what you're after, then that can only be good.

I think they're great for effectively interest-free loans for personal stuff you want - big stuff, like cars, boats etc. Stuff that has no claimable nature. On the other hand, if you have the cash to offset against things like that, just buy it with the cash. Net effect is nil, although you won't have the opportunity to use that revolving credit as you say.

Fence-sitters 'R us.

[gavinc]

as I see it you need to keep your property and personal finances separate.Problem is the mortgage interest on you PI goes up/down according to the amount in your offset account - the amount offset is say 200k then that's 12k of mortgage interest (at 6%) that you cannot claim against your PI. You would be better off putting the 200k in an interest bearing account @5% earning $10k and using the 12k of mortgage interest as a cost against your pi -

[spaceman]

Not sure if this is accurate or not....but it was told to me and sounds semi-plausible....and something to perhaps be wary of tax wise.....I haven't bothered to verify one way or the other as it doesn't affect me and is unlikely to.

Soooooo you're paying interest on $140k.....you decide to take $100k of "your money " and spend it on cheap booze and expensive women.

Now you're paying interest on $240k....your loan has "increased".....IRD says the extra interest isn't deductible as the increase in the loan wasn't for producing assessable income.

There are obviously ways to do this so it isn't an issue tax wise and I'm unsure if the IRD would take that approach to the increase in interest payments....but it seems like it could be possible to tit it up and end up worse off tax wise.

Cheers
Spaceman

[TheLiberalLeft]

You certainly could tit it up, especially given the expensive women expense.

[speights boy]

To me it means I have the effectiveness of a revolving credit without the concern that the bank could shut it down.

Haven't looked at offsets Toasty.

Why is there no concern the bank could shut it down?

[TheLiberalLeft]

I'm guessing it's because s/he thinks the exposure is the net difference. I'm pretty sure the bank would count the entire revolving amount as "exposure".

[Toasty]

Not sure if this is accurate or not....but it was told to me and sounds semi-plausible....and something to perhaps be wary of tax wise.....I haven't bothered to verify one way or the other as it doesn't affect me and is unlikely to.

Soooooo you're paying interest on $140k.....you decide to take $100k of "your money " and spend it on cheap booze and expensive women.

Now you're paying interest on $240k....your loan has "increased".....IRD says the extra interest isn't deductible as the increase in the loan wasn't for producing assessable income.

There are obviously ways to do this so it isn't an issue tax wise and I'm unsure if the IRD would take that approach to the increase in interest payments....but it seems like it could be possible to tit it up and end up worse off tax wise.

Cheers
Spaceman

This is exactly what was worrying me. I choose to believe that the mortgage amount is the exposure from the IRDs point of view and I just happen to lean money against this amount in other "unrelated" accounts which bring the cost down. If I then spend this money on cheap women and expensive booze (each to their own) at some point the increased interest costs are still tax deductible because I never actually paid anything off....I can see the IRD now...eeeek..

[Toasty]

Haven't looked at offsets Toasty.

Why is there no concern the bank could shut it down?

Banks always look at the entire revolving exposure regardless of how much you have paid off. If they deem your exposure is too great, they do have the ability to reduce or remove the facility. I have actually done this to clients in a previous existance as a bank employee.

[speights boy]

Understood, but are you saying this is not the case with offsets?
Trying to understand the no concern bit, when comparing an offset with a revolving credit?

[Toasty]

Understood, but are you saying this is not the case with offsets?
Trying to understand the no concern bit, when comparing an offset with a revolving credit?

A revolving credit account is a variable loan account extended to you by the bank that you can move money in and out of as you see fit. If the bank decides that your credit limits are too high or you are mismanaging this the can remove the facility or reduce its limit to decrease their exposure. An offset account is just your own money being used to reduce the perceived amount of a related loan balance. The bank technically can't grab your money to reduce a loan balance without jumping through some hoops first. I just feel that having cash rather than a R/C enables you to be a bit more flexible in the event of a disaster.

Not sure if I have explained my thoughts very well....

[One]

The way I view it, the bank has to treat an RC as if you'll spend the lot this afternoon. Ditto a credit card limit. They can't stop you from pulling out all the cash so they have to act as if you will.

[speights boy]

Correct One, but can't you do the same with an offset, ie...spend it all today?
So, am struggling to see why they are at less risk of having their limit reduced.
Admit, I haven't looked into them though.

RC pay interest when you're in credit, so I guess they are just simple "offsets" as well.

[buxlo122]

Not sure if this is accurate or not....but it was told to me and sounds semi-plausible....and something to perhaps be wary of tax wise.....I haven't bothered to verify one way or the other as it doesn't affect me and is unlikely to.

Soooooo you're paying interest on $140k.....you decide to take $100k of "your money " and spend it on cheap booze and expensive women.

Now you're paying interest on $240k....your loan has "increased".....IRD says the extra interest isn't deductible as the increase in the loan wasn't for producing assessable income.

There are obviously ways to do this so it isn't an issue tax wise and I'm unsure if the IRD would take that approach to the increase in interest payments....but it seems like it could be possible to tit it up and end up worse off tax wise.

Cheers
Spaceman

I am unsure of the the IRD stance on offsets but I have heard the Aussies (ATO) look at the deductibility of the original loan and ignore the offset. Would be keen to know the IRD stance though.

[Toasty]

I am unsure of the the IRD stance on offsets but I have heard the Aussies (ATO) look at the deductibility of the original loan and ignore the offset. Would be keen to know the IRD stance though.

I have actually asked the accountant and he said he didn't know. I suggested he find out as this will probably become an issue. I will update if I hear anything useful.