Ken Raiss from Chan & Naylor answers a couple of your questions about offset accounts linked to an investment property loan and potential problems and a question about the sale of positively geared property.
Kevin: In our Q&A segment, I’m going to welcome to the show Ken Raiss from Chan & Naylor.
Good day, Ken.
Ken: Good day, Kevin. How are you?
Kevin: Good, mate. Always good talking to you too, Ken. We have so many questions pouring in for you. People are really concerned about structures and finances and so on. Thanks for giving us your time and answering these questions, Ken.
Ken: No, it’s fantastic.
Kevin: Here’s just a reminder for you, too. Any time you have a question for Ken or any one of our experts, just send it in through the website and we will address it for you.
The first one comes from Colin: “During my ongoing seeking of information regarding property investing, I came across a brief mention of a potential tax problem. Would you please have Ken Raiss inform us about offset accounts joined to an investment property loan leading to inability to claim increased interest costs if the balance in the offset account decreases for non-business purposes? Obviously, many individuals would have their personal savings account nominated as the offset account tied to an investment property once their personal home loan is paid off.”
Ken, that was a long question but a very good one from Colin. Can you address that for us?
Ken: Yes. It is an issue that a lot of investors have problems with and make mistakes. In essence, there are two different ways you can set up a separate bank account. One is called an offset account, and the other one is called a redraw.
I’ll talk about the redraw first. The redraw is an account within your existing loan account, so if you deposit money into that account, your loan balance decreases. If you then pull it out, you then need to show what the purpose of that is before being able to claim an interest deduction. If you withdrew it for investment purposes, the interest is deductible. If you withdrew it for personal, then it’s not deductible.
That’s where the offset is very good to use because that is two separate accounts that you have with the bank. Your loan account stays, and then you open up a second account, and when you deposit into there, the bank adds the two balances together of the loan account and the second account to then apply interest.
Then when you take money out of that second account, you don’t have to explain what its purpose was because the original loan account balance hasn’t changed. You have to be very careful and sometimes insist on having an offset account because some banks will automatically put you into a redraw facility.
Kevin: Ken, what would happen if you have a redraw when you find that you need an offset?
Ken: I think go back to your mortgage broker or the strategist who helped you put the loan together, and in the majority of cases, you should be able to swap. There might be a small charge, of course, but it’s well worth doing.
Kevin: Ken, that’s a very good explanation to Colin’s question. Colin, thanks for sending that in.
We have another one for you. I’m going to get my money’s worth out of you today, Ken.
Ken: Good stuff.
Kevin: This one comes in from someone who’s just signed it as S. We’ll just go with S. “Hi, Kevin. Great podcast.” Thank you very much. “Just a question for Ken. Does a person who has a mortgaged, positively geared portfolio have to sell their property or properties to pay the mortgage in full on retirement? I’ve been told that I have to.” This person mentions the name of the bank, which I don’t think we need to mention, Ken. I would imagine that would all be same. Is that right?
Ken: Yes, all the same.
Kevin: S just wants to know, “Any information is greatly appreciated.” What’s the situation there, Ken?
Ken: You have to go back to the bank policy. In the majority of cases, banks give you loans based on your serviceability, the ability to repay. If you’re positively geared, you’re a long way ahead, but unfortunately, older people sometimes are discriminated against by the banks because they look at the term of the loan – how many years would it take you to repay back the principle? If you’re a 60 year old trying to go for a 30-year term loan, the bank says, “You might not survive that long, so maybe I only want to give you a 10-year agreement.”
Again, talk to your finance strategist and get the best terms, especially in this current banking environment where the banks are actually chasing market share and probably doing a few deals. But longer term, I think Australians are certainly discriminated against due to age when they want to get a loan.
Kevin: Ken, great talking to you. Thank you very much to the two people who sent their questions into us. Ken, all the best, mate. We look forward to catching you again soon, and I know we’ll have more questions for you.
Ken: It’s my pleasure, and thank you, listeners.
Kevin: Keep them coming in. Just send them in through the website. As I said earlier in this segment, we will always get an answer for you.