{"id":170870,"date":"2023-02-10T18:36:52","date_gmt":"2023-02-10T18:36:52","guid":{"rendered":"https:\/\/precoinnews.com\/?p=170870"},"modified":"2023-02-10T18:36:52","modified_gmt":"2023-02-10T18:36:52","slug":"help-our-family-is-outgrowing-our-home-how-do-we-afford-a-new-one","status":"publish","type":"post","link":"https:\/\/precoinnews.com\/economy\/help-our-family-is-outgrowing-our-home-how-do-we-afford-a-new-one\/","title":{"rendered":"Help! Our family is outgrowing our home, how do we afford a new one?"},"content":{"rendered":"

Hi Nicole, We are fast growing out of our home, but it has the potential to rent easily due to its location. Are we better off paying down our current loan, or should we just put as much possible into offset accounts to use that money as a deposit to buy a bigger house? Where I\u2019m confused is if you own that home and rent it out, you\u2019re gaining money from rent, so you don\u2019t get the tax benefit side of it. Then, if you go one further, you end up with two mortgages \u2013 one for rental, one for the home you are in. It seems complicated, and I don\u2019t know how to tackle a five-to-seven-year plan to get us into a bigger house. Thank you, Kelly<\/i><\/strong><\/p>\n

Not many readers will expect me to say this Kelly, but there is a smarter strategy than paying off your mortgage right now which, in five to seven years, could allow you to both upsize and retain your current home as a tax-effective investment property.<\/p>\n

<\/p>\n

There is a smarter strategy than paying off your mortgage which could allow you to both upsize and retain your current home as an investment property.<\/span>Credit:<\/span>Fairfax Media<\/cite><\/p>\n

Essentially, you can keep the taxman at bay by \u2018repaying\u2019 it in a special way. The key, as you suspect, is the offset account.<\/p>\n

The first thing you need to know is that any savings you hold in offset accounts \u2013 you might be able to hook up to a dozen individually named offset accounts to your loan \u2013 are netted off your loan balance.<\/p>\n

The interest saving should be identical to paying this money directly into your loan. But do ask your lender whether the money is offset dollar for dollar and whether it is at an identical interest rate. Fixed-rate loans, for example, may offer only a partial offset account.<\/p>\n

The second vital piece of information is that although offset accounts are hooked to a mortgage, they are quarantined from it.<\/p>\n

But, again, you need to check. Only authorised deposit-taking institutions can offer offset accounts that are truly separate from a mortgage \u2013 which is imperative for three reasons (and why this column only ever highlights loans from such institutions).<\/p>\n

1. Safety.<\/strong> In the fine print of most loans is the ability to block redraws \u2013 on which you would be relying if you instead deposited spare cash into your loan itself \u2013 should you get into financial strife.<\/p>\n

What\u2019s more, at least two lenders have in the past \u2018recalculated\u2019 borrowers\u2019 outstanding loan balances and overnight sucked up money that may have been simply \u2018parked\u2019 in a loan to save interest. Indeed, this money could well have been intended for an emergency financial buffer, but then be lost to you. Hardly the point!<\/p>\n

2. The future.<\/strong> You are very canny to be projecting ahead \u2013 many people fail to do this. And though you are doing it because you can see the walls closing in around your presumably growing family, it\u2019s something everyone should do.<\/p>\n

Using an offset account protects your family, gives you ultimate flexibility and sets you up for the future and building your asset base.<\/p>\n

What if you were transferred overseas? What if you decided to take a year off work? The extra money you save could be deployed not just for a deposit on your next home, but for any number of curveballs or opportunities life may throw at you, provided you retain access to it.<\/p>\n

3. Tax.<\/strong> Most people start small in property as it\u2019s clever not to over-commit. Most people then throw every extra dollar they can into their loan.<\/p>\n

Here\u2019s the thing: that means, month after month, that property is becoming more useless to you as a potential investment. You can only claim tax deductions for interest on your lowest-ever loan balance. You would have little choice but to sell your original property. When you instead put these overpayments in a genuinely quarantined offset account, your loan balance does not ever technically fall, it is only deemed to. Your potential tax deductions \u2013 and rental property \u2013 are preserved.<\/p>\n

In short, using an offset account protects your family, gives you ultimate flexibility and sets you up for the future and building your asset base.<\/p>\n

So you are bang on the money Kelly. And hopefully, be in<\/i> the money after five to seven years of diligent saving.<\/p>\n