tech/a
No Ordinary Duck
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What am I missing here?
To offset interest on $500k loan I will need 500K in another account earning interest???
The future of Australian property prices
- Thread starter Joe Blow
- Start date
What am I missing here?
To offset interest on $500k loan I will need 500K in another account earning interest???
Yup. That is all about dedication and saving <sarcasm.\>
Honestly, buying a property now would just be like handing my money over to someone like tech/a and selling yourself to slavery to the banks.
Great Australian Housing SCAM.
You buy a PPOR if and only if you spend no more than 30-40% on the mortgage and no more than 45% on total holding costs including maintenance. The 40% figure is for if you can buy a really nice house in an area you desire. If you need to spend 40% of your income on just the mortgage and it is an hour from the CBD, no public transport 3 bedroom (or 2 bedroom) poorly built dog box then you cannot afford it.
If you're on a high income, you should aim to have at least $800 out of ONE INCOME spare after paying the mortgage then you can go over the 40% mark.
Just my opinion and it is the number I use to decide I cannot afford to buy a house.
My parents were able to afford a house with similar ratios of VERY LOW incomes back in the early 90s and that is where I believe things will trend back towards, probably more like the early 2000s though.
If you're on a high income, you should aim to have at least $800 out of ONE INCOME spare after paying the mortgage then you can go over the 40% mark.
Just my opinion and it is the number I use to decide I cannot afford to buy a house.
My parents were able to afford a house with similar ratios of VERY LOW incomes back in the early 90s and that is where I believe things will trend back towards, probably more like the early 2000s though.
I personally would not listen to advice like this. Mathematically it does not make sense and is based on the nostalga of compounding 10% price gains seen in the past 10 years.
I do not know the perfect strategy myself but I can see the above leading to over paying for a "renovators dream" and after minor unskilled renovations having a house on the market priced 100k above high quality dwellings which won't sell and for which the vendor cannot sell for less or he/she will go bankrupt and then in negative equity for a decade. Unable to sell, unable to renovate properly, constant problems in the house and shoveling away your wage into minimum repayments on the "home" which ruined your life.
Meanwhile the elderly baby boomer investor will be on a beach in Asia somewhere, talking about how his dedication, savings and hard work allowed him to ride a property boom. The timing just ins't the same.
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Man you talk a lot of crap. Mathematically it makes sense and doesn't require 10% compounding price gains. Tech stated the price gains come from renovating and selling - using the extra cash generated to buy an upgrade and taking advantage of PPOR CGT exemptions.
Of course you have to do your research and know what you're doing - no sense putting in 50k worth of renos for a 50k gain in capital. I'm employing the same strategy and it's working very well for me. The issue is most people are too negative/lazy/undisciplined to do some hard work and think outside the box.
It's really not that hard. It's been less than two years and I have doubled my equity whilst still being able to do my day job.
Haters gonna hate, whingers gonna whinge.
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On the Noble Park property? I thought not that long ago you said it has dropped in price slightly
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I am glad to see that some people are still working hard in these conditions and coming out on top!
If you don't mind elaborating, could you explain your strategy a little more as I am very interested
tech a, obviously you are unaware of how offsets work
you do not earn interest on the offset account, and you do not pay interest on the equivalent amount of the loan
who has a mortgage of $500 k...not your average home buyer of FHB that frequent these threads
so if I have the average loan of $239k, and put up $100k in the offset account, I only get charged interest on the balance of $139k
makes a huge difference to the interest cost
to the other poster, Westpac do not allow another esaver account if you have held one in the past 3 months, and I assume the fine print for the other banks are the same
fine if one wants to keep changing and opening banks accounts to chase these amounts
I had a substantial amount in one account , believing it was earning 5.85 at the time, when no interest arrived and I checked, the bank had changed the rate to zero...they do not send you a letter, or call to advise the changes
the other poster on the average rate of tax...if you are on an income of $50,000pa your average tax rate is around 20%....big deal if the actual rate on $1000 of that money is 30%, so you put it into super, it is taxed at 15% upfront before it has a chance to earn any money. so it is not $1000 earning any income, it is only $850 and then the income is taxed at 15%...then you need to wait years for retirement to get your hands on it.
Some people would be better off having the $800 extra to pay off their mortgage, than to put it into super.
($1000 taxed at 20% average rate) than $850 sitting around for years for fund managers to take their cut each year, plus tax on the income
I look at the bigger picture
you do not earn interest on the offset account, and you do not pay interest on the equivalent amount of the loan
who has a mortgage of $500 k...not your average home buyer of FHB that frequent these threads
so if I have the average loan of $239k, and put up $100k in the offset account, I only get charged interest on the balance of $139k
makes a huge difference to the interest cost
to the other poster, Westpac do not allow another esaver account if you have held one in the past 3 months, and I assume the fine print for the other banks are the same
fine if one wants to keep changing and opening banks accounts to chase these amounts
I had a substantial amount in one account , believing it was earning 5.85 at the time, when no interest arrived and I checked, the bank had changed the rate to zero...they do not send you a letter, or call to advise the changes
the other poster on the average rate of tax...if you are on an income of $50,000pa your average tax rate is around 20%....big deal if the actual rate on $1000 of that money is 30%, so you put it into super, it is taxed at 15% upfront before it has a chance to earn any money. so it is not $1000 earning any income, it is only $850 and then the income is taxed at 15%...then you need to wait years for retirement to get your hands on it.
Some people would be better off having the $800 extra to pay off their mortgage, than to put it into super.
($1000 taxed at 20% average rate) than $850 sitting around for years for fund managers to take their cut each year, plus tax on the income
I look at the bigger picture
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not sure about westpac, but NAB and ANZ sure do, I have about 20 open with both banks uptodate and have been receiving 5% with ANZ on each new one. The old ones just go back to 3% of whatever. Its not against bank policy, they even encouraged this to me. Maybye time to shop around and do some research as mentioned before
prawn_86
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We are toying with the idea of buying our 1st ppor in a couple years time. Even with deposit the mortage will be up around the 400k, there is just no other choice if one does not want to spend more than an hour travel each way.
So you're saying you get paid interest on the money in the offset account, and not charged interest on that equivalent amount off your loan?
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Someone correct me if I am wrong but my understanding was; If you have a loan of 400k with an offset account, if you put 50k in the offset account (which doesn't earn interest like a normal HISA) the amount of principle you pay in each repayment is calculated as if your mortgage was 350k.
In short the amount in the offset account acts as if you made additional repayments to the loan which pays off the principle faster, but gives you the option to use or remove the money at will.
prawn_86
Mod: Call me Dendrobranchiata
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That is what i would of thought. So it is bascially a redraw account where you can redraw any additional payments you have made.
Would like to here from Kincella though
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Like I said that was my understanding so no guarantees
A lot of the time you can attach a normal transaction account to it, allows you to have your salary paid into it and gain any small benefit from that. Alternatively you could use it to save for home improvements and benefit from parking the money in the offset.
I am in a similar situation to you prawn, will see that the others say!
Just try reading again, this time with your eyes open. I bolded it just so you can see it with your 'big picture' eyes.
They don't HAVE $800 to put off their super, there is no AVERAGE RATE in our income tax system. They are paying 34% with an income of 50k pa. They have $660 dollars. If they salary sacrifice it (which I didn't recommend as I would personally pay down my mortgage so that I can refinance for smaller monthly payments, a better interest rate or redraw for tax effective investment purposes first) they have $850.
You don't need to roll over and 'have fund managers take their cut each year', take control of your super and take advantage of the vast number of low fee investments available.
Anyway, this is a property thread so I will leave that train of thought there.
You are right about mortgage offset accounts, they are a great tool and a very simple way of generating the equivalent of a decent return with no tax consequences for parking money in the short term.
I personally just follow the belief that if I buy in an area that is likely to be in demand into the future (access to places where people work, educate their kids, public transport, health, not on floodplain etc etc) I can bank on at least growth with inflation over the long term.
tech/a
No Ordinary Duck
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Ah--yeh
(1) So you need to have X available in spare cash to place in an offset account.
OR
(2) Make higher payments so you can offset an amount over time.
Fine provided you cant do better than bank interest on the amounts being tied up.
Again your being a very good client offering the bank even more security with your money.
Like going into the bank asking for an overdraft and they want cash security.
So why not use your own cash in the first place!!
Money in an offset account isn't tied up for starters Tech.
tech/a
No Ordinary Duck
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Really?
If I take it out they still offset the interest against my mortgage?
Of course its tied up! I cant use it.
I only ever hold cash whilst twiddling my thumbs and waiting for the next opportunity to invest.
I do hold xxx amount for unforeseen circumstances.
there is not much that interests me as an investment in the current climate
It is this money I am using for the offset accounts.
It is earning the equivalent of 6% deposit rates
they do not pay you interest on the deposit amount
nor do they charge you interest on the loan account, to the amount offset
the end result is the same as if you are earning say 6% on deposit
and paying 6% loan rates
in the earlier example provided, $100k saving loan interest at 6%= saving of $6000 interest
so it gives one the ability to pay the extra $6000 off the capital,
at the same time keeping the loan repayments at the old monthly rate
kidding that is not a saving, or a benefit in this day and age
they are not the old type of everyday account , where people put some salary in on a temp basis
they are very specific accounts
not everyone offers this account
some banks restrict them to variable loan accounts
they cannot be used to offset a fixed loan account
some do offer them against the fixed loans
if you are in investor, there is less income to pay tax on, for the deposit income, since there is none
and less claims for the interest expense, since it does not accumulate nor is it paid
if you have parents, who would trust you, with their extra cash, it can work
or vice versa for wealthy kids to look after their parents
it is considered as an asset for age pension purposes
they are specific offset accounts....I suggest you google the question
The average rate of tax....
for the current year 2012-2013
tax on $80,000 is $17547 / 80,000 = .219%
tax on $37,000 is $3572/37,000 = .0965%
cheers
I do hold xxx amount for unforeseen circumstances.
there is not much that interests me as an investment in the current climate
It is this money I am using for the offset accounts.
It is earning the equivalent of 6% deposit rates
they do not pay you interest on the deposit amount
nor do they charge you interest on the loan account, to the amount offset
the end result is the same as if you are earning say 6% on deposit
and paying 6% loan rates
in the earlier example provided, $100k saving loan interest at 6%= saving of $6000 interest
so it gives one the ability to pay the extra $6000 off the capital,
at the same time keeping the loan repayments at the old monthly rate
kidding that is not a saving, or a benefit in this day and age
they are not the old type of everyday account , where people put some salary in on a temp basis
they are very specific accounts
not everyone offers this account
some banks restrict them to variable loan accounts
they cannot be used to offset a fixed loan account
some do offer them against the fixed loans
if you are in investor, there is less income to pay tax on, for the deposit income, since there is none
and less claims for the interest expense, since it does not accumulate nor is it paid
if you have parents, who would trust you, with their extra cash, it can work
or vice versa for wealthy kids to look after their parents
it is considered as an asset for age pension purposes
they are specific offset accounts....I suggest you google the question
The average rate of tax....
for the current year 2012-2013
tax on $80,000 is $17547 / 80,000 = .219%
tax on $37,000 is $3572/37,000 = .0965%
cheers
So you think it's fixed like a term deposit?
What would happen if you needed money for an urgent operation (say your brain example) you wouldn't be penalized for it if it were sitting in an offset account. It isn't tied up.
prawn_86
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Yes but then your interest payable would increase due to removing funds from that account. Unless i too am missing somehting i don't see how it is different to a redraw facility
