To the knowledgeable SMSF investor, an offset account is a ‘must-have’, both inside and outside of super.
An offset account is a valuable feature of a SMSF loan. This is due to the fact that SMSFs generally hold a reasonable proportion of cash within the SMSF, either for a ‘rainy day’ or thinking about your next investment. The benefit of an offset is clear, the cash held in your SMSF will offset you loan and save you interest on your loan in the short term and long term.
What is an offset account?
An offset account is a transaction account that can be linked to your SMSF, home or investment loan. The credit balance of your transaction account is offset daily against your outstanding loan balance, reducing the interest payable on that loan.
Offset accounts enable you to make the most of your income and other funds to reduce the interest payable on your home loan, thereby reducing your loan term.
How can an offset account benefit your SMSF?
The use of an offset account is used as an effective borrowing strategy for many SMSF investors however, not all lenders include the offset feature. Most SMSF investors will purchase property using a loan and the rent and contributions can be paid into the offset account, therefore reducing the interest paid on the loan.
Lets use a real life example using a hypothetical interest rate of 5.88%. A customer with a $150,000 home loan over 30 years would pay approximately $167,000 in interest.
If the customer had an offset account linked to the SMSF loan for the entire loan term with a constant balance of $10,000 in it, they would pay the loan off in 26 years and 4 months and pay just approximately $127,553 in interest.
This represents a saving of three years and eight months and approximately $38,636.95 in interest.
Remember you can withdraw from the offset at any time and use the cash to invest in shares or pay for SMSF expenses – whilst saving interest on your SMSF Loan in the long term.
A SMSF offset account is valuable and it will be prudent to consider a lender with an offset account as not all SMSF lenders include this feature which will reduce your loan repayments in the long-term – enabling you to save up for your next investment(s).
I don’t have an offset for my SMSF Loan, can I refinance?
Under s67A refinancing is allowed, which means a SMSF Trustee will not be locked with one lender for the life of the loan however it is
important to seek professional including taxation advice before refinancing. If your current SMSF Loan does not have an offset account and your rate is higher than the comparison rate, you may benefit from speaking to a credit advisor in relation to a refinance with an offset account.
Do all SMSF lenders offer an offset?
Unfortunately, not all SMSF lenders offer an offset. There are a couple of leading lenders who offer an offset account with a higher variable rate, which may be worth it in the long run. Contact us for more information on who they are.
Its obvious that the offset account can benefit you in the long term with your SMSF cash including rent and contributions being offset against your SMSF loan repayments resulting in a monthly/annual loan repayment saving. Remember that the ‘offset’ is completely tax free!
This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not
constitute formal financial or credit advice – Redwood Advisory Pty Ltd does not hold an Australian Credit License. Consider the appropriateness of the information in regards to your personal circumstances.