Why Use This Calculator?
- Calculate the actual interest saved with an offset account
- Discover the effective pre-tax return rate, crucial if you pay income tax
- Make informed decisions between investing and using an offset account
If you've got some extra cash lying around, you're probably torn between investing it or keeping it in your mortgage offset account.
Each option has its own merits, but how do you accurately weigh them against each other?
This tool helps you see exactly how much you could save in interest by using an offset account.
But we don't stop there— the calculator also takes it up a notch by showing you the ‘true' rate of return, factoring in your tax rate.
Why Consider Tax Rates when using Mortgage Offset Accounts?
When you hold money in a standard investment, your gains are often subject to taxes.
So, when you're comparing the benefits of an offset account against taxable investments, you're not comparing apples to apples unless you consider the tax impact.
The offset account offers a ‘tax-free' benefit, meaning you're saving money that you don't have to pay tax on.
This essentially boosts the ‘return' you get from your offset account, making it a potentially more lucrative option than you might have initially thought.
By including your tax rate in the calculations, it gives you a more complete and transparent picture of your potential savings, enabling you to make a well-informed financial decision.
Additional things to consider
- The calculation is slightly more complex if comparing it to investments that yield fully franked returns
- This does not take into account potential capital growth return.
- Capital gains are halved for investments held for more than 12 months
- Capital gains are only taxed in the year you sell, not the year they are earned (ie. your tax bracket could be 18% when you start selling).
The information provided by this calculator is intended for informational purposes only and should not be considered financial or professional advice. Always consult with a qualified advisor before making financial decisions.
This calculator takes into account a simplified view of tax implications, and it does not consider your entire tax situation. Tax laws and rates are subject to change, and individual circumstances can vary.
Annual Interest Saved with Offset Account:
This is how much you save on mortgage interest in one year by having your money in an offset account. This saving is tax-free, which could make it more valuable than it initially appears.
Effective Pre-Tax Annual Return Rate:
This rate represents what you'd need to earn in a taxable investment to match the tax-free benefits of the offset account. So, if you find an investment that offers a lower return than this rate, the offset account is likely the better option, especially after taxes are considered.
What is a Mortgage Offset Account?
If you've ever stumbled upon the term ‘Mortgage Offset Account' and wondered, “Offset account, how does it work?”, you're in the right place.
A Mortgage Offset Account is a special kind of savings or transaction account linked to your home loan.
Money in this account ‘offsets' your loan balance, reducing the interest you pay, and thereby accelerating your journey to a mortgage-free life.
How Does a Mortgage Offset Loan Work?
Imagine you have a $300,000 mortgage and $50,000 in your offset account.
Instead of paying interest on the full $300,000, you'd only pay interest on $250,000.
This simple mechanism can save you thousands of dollars and shave years off your mortgage.
Who Should Use This Calculator?
If you have some cash on hand and are torn between investing it or using it to offset your mortgage, this calculator is for you.
It provides a clearer, tax-adjusted picture that can help guide your financial decisions.
Offset Account vs Taxable Investment: A Quick Example
Let's say you've got $20,000 in spare cash. You have two main options:
- Put it in a mortgage offset account with a mortgage rate of 4.5%.
- Invest it in the stock market, aiming for an annual return of 6%.
Offset Account:
- With a 4.5% mortgage rate, putting $20,000 into an offset account would save you $900 in interest over one year.
- If your marginal tax rate is 30%, you'd actually need to earn $1,286 pre-tax to save that $900 if the money were in a taxable investment. So, your effective pre-tax ‘return' is 6.43%.
Taxable Investment:
- You're aiming for a 6% return, so on $20,000 that's $1,200.
- But wait, you've got to pay tax on that. At a 30% tax rate, you'll lose $360 to the taxman, leaving you with $840 net.
The Verdict:
- The offset account ‘earns' you a tax-free $900, while the taxable investment nets you $840 after taxes.
- In this scenario, the offset account not only saves you more but does so without the typical risks involved in investing.
This is precisely what our calculator helps you figure out: the actual benefits of an offset account, factoring in your personal tax situation.
Hope this example clears things up a bit!
