Options allowing for lower rates and fee free loans are on the rise. Usually, these benefits are offered with basic lending packages, which would not come with access to an offset account.
While this may suit clients in their specific circumstances, they need to remember a few benefits of offset accounts.
A commonly known benefit of an offset account will offset your interest.
An example: A $500,000 loan limit with $100,000 in an offset account, allows clients to pay interest only on $400,000 as the $100,000 in offset account. This will lower your total interest charges to fall on the loan amount minus the amount in the offset account.
If client's place their savings in the linked offset account, their repayments will not change. However the loan principle will go down faster due to the extra saving's on interest being allocated to the principle portion of your loan.
An offset account is fully transactable at most lenders, in most cases, giving client's the flexibility of an everyday account. Client's can draw down the funds in their offset at any time, allowing them to move funds around when they need.
Alternatively, clients without an offset account can simply reduce their interest cost by paying funds directly in the loan reducing the Loan balance and therefore interest cost. This strategy would normally utilise a redraw facility or paying down the balance.
However, a key a key benefit of an offset account that is not as widely known or understood is that it allows a client to reduce their interest cost without paying down their loan balance. Why is this a benefit? Well it is a potential tax benefit in the future. Essentially, if a client pays funds into their redraw then they have paid down the loan.
When drawing those funds back out of redraw a client is effectively using those newly drawn funds for a fresh purpose changing the purpose of the loan to whatever those funds are used for.
When drawing those funds back out of redraw, a client is effectively using those newly drawn funds for a fresh purpose changing the purpose of the loan to whatever those funds are used for.
If a client draw funds back out of their redraw to invest in an asset, then the portion of the loan they drew those funds from may become tax deductible. But if the use those funds is for non-investment purposes then the portion of the loan drawn would probably not be tax deductible. Similarly, if funds are paid into an investment loan as an example $100,000 into a $500,000 investment loan, then drawn back out to use for non-investment purposes, that may actually make that $100,000 portion of your investment loan no longer tax deductible.
So, a way to protect your lending and the purpose it was used for is to have an offset account and not use the redraw facility.
Now to be clear this is not advice and Lendtribe are not tax advisers nor tax agents. Clients need to discuss these tax related items with their accountant to confirm and clarify their understanding.
Lendtribe are strong believers in offset accounts for most clients and believe all clients should have a clear understanding of their true strategic benefit today and in the future.
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