Anita’s goal needs ... Offset strategy

Q I am 19 and own a property worth $125,000 with a loan of $77,000. I have a $3000 deposit and have set up a $200-a-fortnight saving plan. I earn $28,000 a year. I would like to buy another property in three to four years’ time with a 20%-plus deposit. I’d like to live in it, in five to six years. What is the best way to save my deposit and should I look at redrawing on my loan when I buy the next property?

A It’s great to see you investing at such a young age. Buying a property with an appropriate level of debt is a fantastic way to help you put aside money every month and build wealth in the long term, particularly when you get into good habits while still young.

I’m not sure whether your current property is an investment property but, assuming it is, I’d suggest setting up your current loan as a 100% offset account. Any additional money you put into the offset account reduces the size of the loan for interest calculations, just as with redraw. But with redraw, once you put money in your loan is reduced and the interest able to be claimed as a tax deduction falls. With offset, additional funds don’t affect the loan balance and if you withdraw the extra funds you can claim all the interest you’ll pay.

An example may help. If you bought a $100,000 investment property with a loan of $90,000 and paid in an extra $20,000, tax-deductible interest is calculated on $70,000. But if the $20,000 goes into an offset account, you will only pay interest on $70,000 but the loan remains at $90,000 from a tax-deductible viewpoint.

Due to your short time frame, I’d suggest saving through an offset account, term deposits or a high-interest online savings account.

Five to six years is generally considered too short for investing in shares because of their volatility. An offset account against your current mortgage would be preferable if you can find one that is 100% offset and fee free, as it will have the highest effective rate of interest – your mortgage rate – and it’s untaxed.

Once you buy a new property, I’d again suggest an offset account rather than a redraw account.

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