You actually don't need an offset account on your investment property. Just pay IO on the investment property to maximise the interest deductibility and put any surplus cash against your PPOR loan (either in an offset or directly against the loan balance) = 2 loans and 1 (or zero) offset accounts. That is why the number of IO loans will always be higher than the number of offset accounts. Simples.
and all those IP's that dont have an offset account, dont have funds offset into their mortgage... simples...
He cites recent APRA numbers that show the banks, or authorised deposit-taking institutions, have $413 billion of loans out to the investment property market, of which $369 billion are interest-only.
"That's 89% of people who are so confident that their property price is going to go up that they think they don't have to pay off capital," he wrote.
Rubbish. There are many reasons why you might go interest-only given the products available at the moment. The main one is that IO loans, in tandem with offset accounts, give you finer control of your leverage level, and you also have fewer issues to do with "tainting" loans. It has absolutely nothing to do with where any particular borrower thinks their economic return is going to come from. You have to look at how they are operated to work out what the borrowers are thinking or what their intentions are.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
So according to this, 35% of loans have offset accounts.
The other feature available on loans without offset account, is redraw facility. So rather than pay Principle + Interest, I again have instead an Interest Only loan, and then put any extra money into the loan, but available via re-draw (and having the money available), and not lock it in by paying principle on loan (and needing to refinance if need the money). Again if I have an 80% interest only loan on a 300K property, then pay the remaining $240K I have into the loan (into the redraw facility), I pay $0 interest, and it's as if I have paid off the loan!!!.
So the combination of 1) Interest Only loan + 100% offset account 2) Interest Only loan + redraw facility would account for the 89% of people who get interest only loans.
The other 11% are the dumb folk who get Interest + Principle loans, and lock their money into the home loan and then struggle if they have an emergency and need cash quickly. Don't confuse "Interest Only" as not paying off the loan at all. There are so many loan options available these days, that still "pay off" the loan, but also make the loan payments available when required.
and what proportion of those new mortgages for those IP's do you suppose have paid their redraw facility in full ?
so help me understand - as my current understanding is you are saying this investor has:
-put all their cash they have against their PPOR in the offset account -their IP sitting there with interest only and no offset account ( but using tax deduction on interest )
so of the two loans this particular investor has, one has an offset account - and one does not... one house has cash against it, the other does not...
edit:sorry for the number of ninja edits - was some really terrible grammar ..
so help me explain- my understanding is you are saying this investor has:
-put all their cash has against their PPOR in the offset account -their IP sitting there with interest only and no offset account ( but using tax deduction on interest )
so of the two loans this particular investor has, one has an offset account - and one does not... one house has cash against it, the other does not...
Yes. That's it, although only a proportion of people will have an offset account against their PPOR as some will just have a straight loan account (with or without a redraw facility).
This is consistent with the data you provided (although there was no data about equity but we know that Australian's are commonly ahead (buffer) on their loan payments from other reports).
so help me understand - as my current understanding is you are saying this investor has:
-put all their cash they have against their PPOR in the offset account -their IP sitting there with interest only and no offset account ( but using tax deduction on interest )
so of the two loans this particular investor has, one has an offset account - and one does not... one house has cash against it, the other does not...
edit:sorry for the number of ninja edits - was some really terrible grammar ..
Well, if you have a loan whose original purpose to purchase a PPOR and another loan whose original purpose was to purchase an IP which you are currently renting out, the obviously your best strategy for whatever level of amortisation of debt that you wanted to do would be put it all against that PPOR, since interest on the PPOR loan is paid with after-tax funds and the interest on the IP is paid with before-tax funds.
The way to do that is to go IO on the IP loan while you are still paying off the PPOR. This holds true whether you are paying off $10k per annum or $100k per annum. The existence of an IO loan tells us nothing about what the owner/investor is actually doing or thinking.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
Yes. That's it, although only a proportion of people will have an offset account against their PPOR as some will just have a straight loan account (with or without a redraw facility).
This is consistent with the data you provided (although there was no data about equity but we know that Australian's are commonly ahead (buffer) on their loan payments from other reports).
great so to surmise,
those IO IP's with no offset accounts are essentially IO loans with no offset accounts - and no additional capital hidden in a corner to be dumped on them unless the owner transferred capital from their PPOR ....
so there is nothing wrong with stating that only about half of the mortages that are IO have offset account at their disposal which is likely hiding any extra capital on the property...
This is consistent with the data you provided (although there was no data about equity but we know that Australian's are commonly ahead (buffer) on their loan payments from other reports).
There seems to be very little granular data about equity. We only have some very coarse numbers:
Total Assets - residential housing - $5.5T Total outstanding mortgage debt with ADIs: $1.4T Average offset account balance: 15% of outstanding loan
From this you can derive Nett debt of about $1.2T
hence a leverage ratio of 5.5/(5.5-1.2) = 1.28
or if you like to quote it as a debt ratio, Nett debt/assets = 22%
Massive
9 Sep 2014, 08:47 PM
so there is nothing wrong with stating that only about half of the mortages that are IO have offset account at their disposal which is likely hiding any extra capital on the property...
You only need to have one loan with an offset facility if you have multiple loans.
Take for example my case where I have three loans (all on IPs - I rent my PPOR). two of them are IO fixed for various terms and one is a P+I variable rate with an offset account. As long as I don't go wild and totally offset my P+I loan I have exactly the same level of control as if all three had offset accounts.
Or look at the situation about 12 months ago. I had two loans, both P+I variable, but I only had an offset on one of them because the other one was a no-frills product that had a lower interest rate and did not offer an offset account or redraw facility.
I only went IO because my leverage ratio was threatening to get too low because of those principal payments and I plan anyway to be investing capital into renovations and do not want to be applying for more credit when that happens.
Take for example my case where I have three loans (all on IPs - I rent my PPOR). two of them are IO fixed for various terms and one is a P+I variable rate with an offset account. As long as I don't go wild and totally offset my P+I loan I have exactly the same level of control as if all three had offset accounts.
Or look at the situation about 12 months ago. I had two loans, both P+I variable, but I only had an offset on one of them because the other one was a no-frills product that had a lower interest rate and did not offer an offset account or redraw facility.
I only went IO because my leverage ratio was threatening to get too low because of those principal payments and I plan anyway to be investing capital into renovations and do not want to be applying for more credit when that happens.
yep.. i get that.... and i dont dispute its use / application at all..
just weeding out the implication that "most" IP's with IO loan have an offset account that is loaded with cash that is not showing up in the statistics, or implying that large proportion of offset accounts are generating 0 interest as they have a fully stocked redraw facility ... i have no doubt there are examples of this, but id bet its not a majority, particularly in new loans ..
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