Why’s I’d fair to tax the interest on savings when I can’t claim the increased cost of everything else as a tax deduction?

[danmat777]

@presmom22 Aren’t Offsets just paying down the mortgage without losing access to the credit. The minute you pull that money out of the offset your interest repayments go up as if you’ve just borrowed more money from the bank.

 

[jrminoh]

@danmat777 Yes... Exactly...

 

[danmat777]

@jrminoh So it’s not really savings then it’s more like liquid equity.

 

[danmat777]

@jrminoh If you pull all your savings out of your offset to buy something your interest repayments go up because now you’re paying interest on the full home loan so isn’t that just the same as having no mortgage but using all my equity to buy something?

 

[tsan]

@danmat777

If you pull all your savings out of your offset to buy something, your interest repayments go up

No, you're thinking of redraw.

Your repayments don't change with an offset, just the total principal (debt-offset) you owe is calculated on.
100k debt - 20k offset = 80k your interest is calculated against and charged for.

The repayments stay the same, but your loan term will reduce as you'll be paying less interest.

A redraw is an overpayment on a loan that reduces the total principal. Instead of altering the loan length, the replayment is changed, so if you lump summed 20k onto 100k loan, it would recalculate your minimum repayment based on 80k over your remaining contract length.

 

[danmat777]

@tsan Huh? If you have 100k sitting in an offset of a 100k mortgage you’re paying 0 interest. If you pull that 100k out to buy a car you will suddenly be paying interest on 100k, something like 6% pa. So your interest repayments go from 0$ per year to $6000 per year. They go up.

 

[tsan]

@danmat777 I said 20k, not 100k in the offset. But in either case, your repayments won't change, just the term length as the % of repayment that is the interest component will be reduced.

If you fully offset your loan, your repayments would be 100% coming off the principal amount, and your loan length would only be a couple of years.

 

[danmat777]

@tsan But if you take that money out of the offset you have to start paying interest on it so it’s not the same as savings account, if take my money out of my savings account I don’t get charged interest. I’m not seeing how the offset is any different than equity.

 

[kijani]

@danmat777 Yes it goes down the minute it’s taken out. The same as an interest earning account.

With an offset, you don’t pay tax. This makes it’s savings, earn you almost and extra 30% depending on your tax rate. It’s the smartest low risk return.

 

[danmat777]

@kijani So what’s the difference between leaving money in the offset and paying down the mortgage? It’s the same thing in regards to interest rates and tax isn’t it .

 

[kijani]

@danmat777 In regards to tax, if it’s an investment or you wish take make it an investment an offset is much easier to claim more interest as a deduction.

If you pay the loan down, to claim more interest for an investment you need to prove your use of funds for investment purposes and a portion the interest payments.

 

[presmom22]

@danmat777 Well yes. The point I was making is you get benefits from that money without getting taxed on it.

 

[danmat777]

@presmom22 So hypothetically if I go borrow 50k and leave it in the offset how am I benefitting?

 

[presmom22]

@danmat777 Think it’s been explained elsewhere but I’ll have a crack. To keep things simple, let’s say mortgages rates and savings rates are both 10%. $50k in a savings account will get you $5k interest. Take away tax you’ll be left with roughly $3k.
$50k in an offset account will save you paying $5k interest. To do better than that, a savings account would have to get you roughly $8k (pretax).