Offset Account for Investment Property

Wondering whether you should have an offset account for your investment property loan?  Find out the tax implications with Savvy.

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, updated on August 8th, 2023       

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Many property investors seek the tax advantages that negative gearing can bring, so having an offset account to reduce the interest you pay on your investment property may seem counter-productive.  However, the tax implications of an offset account are quite complex, so you can read about the pros and cons of a mortgage offset account for investment property right here with Savvy, as well as compare your finance options.

Should I use an offset account with my investment loan?

One of the attractions of buying an investment property is the tax benefits that are to be gained through negative gearing.  This means if your investment makes a loss (because the rent you receive doesn’t cover the cost of your investment home loan), you’re able to claim a range of costs associated with your investment as a tax deduction.  This is the basis of negative gearing in Australia and means you can claim the interest portion of your investment loan as a tax deduction.

Therefore, in this situation, an investment home loan with an offset account (which is designed to reduce the interest you pay on your loan) may not be the best idea, because it’d reduce the interest you’d pay on your investment loan and therefore reduce the income tax deduction you’re able to claim. This would reduce the effectiveness of your investment property as a legitimate tax reduction vehicle. 

As an example, if a borrower has an investment loan of $350,000 on a negatively geared property but has $50,000 in an offset account linked to that loan, they will only pay interest on $300,000, as the remaining sum is offset.  Therefore, the amount of interest paid is lower, and so the tax deduction they can claim against their income is reduced, meaning they’ll pay more income tax.  You can use Savvy’s income tax calculator to work out how much you’re currently paying according to your taxable income and see how a deduction can make a difference.

How can I best use an investment home loan with an offset account?

There are several ways in which you can best use an offset account with an investment home loan. If your investment property is positively geared (meaning it makes a profit once mortgage payments have been considered), an offset account does make sense.  By reducing the interest you pay using an offset account, you may save more money than you would if you housed your savings in a savings account.

Additionally, offset accounts can be important for keeping the purpose of the loan consistent.  While interest can be claimed as a deduction on an investment property loan, depositing additional funds and subsequently withdrawing them for another purpose can affect the loan’s purpose and your ability to benefit from tax deductions.  An offset account in place of a redraw facility helps to keep everything consistent and avoids this potential pitfall.

What are my alternatives to having an offset account on my investment loan?

Rather than having a mortgage offset account for your investment property, it’s often a better idea to have the offset account linked to the loan for the home you live in.  Your residential property mortgage expenses can’t be claimed as a tax deduction or used for negative gearing purposes, so it makes sense to minimise the interest you pay on your home loan, not on your investment property.

As an alternative to an offset account, if you have an investment property with a redraw feature, you may be able to use it to take out a lump sum to either use as a deposit for another investment property or conduct renovations or home improvements (which will impact your loan’s purpose as discussed above).  Use Savvy’s lump sum repayment calculator to see how much interest you could save by making a lump sum reduction to your home loan.

You may also be better off choosing or refinancing to an interest-only loan to maximise your tax deductions.  If you do get an interest-only loan, the principal sum you borrow will remain constant and won’t reduce, but 100% of your loan interest payments will be tax-deductible.  You can continue paying interest-only on your loan as you hold onto the property while house prices rise.  When you eventually do decide to sell your property, you can benefit from the higher price you’ll hopefully receive at sale time.  This strategy isn’t as effective if you aim to keep your property in the long-term.

What expenses can I claim on an investment property?

You can claim a tax deduction (in the income year you incur the expense) for all investment property expenses including:

  • the interest on your investment loan
  • the cost of advertising for tenants
  • the cost of hiring a property manager
  • the cost of visiting your property once a year to check on it
  • council rates
  • emergency services levy
  • sewerage and water connection charges
  • repairs and maintenance
  • depreciation of assets costing $300 or less

More of your frequently asked questions about offset accounts for investment loans

Are investment loans generally more expensive than standard home loans?

Yes – investment home loans with an offset account generally have an interest rate which is 0.5% to 1.5% p.a. higher than owner-occupied home loans, as they’re perceived to be riskier loans.  Compare your options with Savvy to find the best investment loan rates available for you.

Does it cost more to have an offset account?

Yes – most lenders charge a premium of between 0.1% and 0.3% p.a. on top of standard interest rates to provide an offset account. However, there are many low-cost home loan offers available which don’t charge a premium for an offset account, so it’s worth comparing home loans to find the best deal available.

Are variable rate loans or fixed rate loans better for an investment property?
  • If you’re negatively geared: This will depend on whether you’re in a high-income bracket and rely on your investment property to provide you with income tax deductions to reduce your tax bill through negative gearing. If you’re in this situation, you’d be better off with a variable rate loan as interest rates can rise.   
  • If you’re positively geared:  If your investment property is positively geared and you don’t have much spare income to cope with rising interest rates on your investment property, you may want to fix your home loan for as long as you can, which will make your monthly budgeting more predictable and protect you from rising interest rates for a few years.  You can compare 5-year fixed rate loans with Savvy.
Should I make additional payments on an investment loan?

This will depend on your overall financial situation and what your investment goals are.  If your goals are to maximise your income tax deductions, it may not make sense to make additional repayments on your investment loan.  However, if your goal is to build equity in your investment property to be able to use it as security for a second investment property, it may be the best option to pay off your loan as quickly as you are able by making additional repayments.

Can I get a fixed rate investment loan and still make additional lump sum repayments?

Probably not – fixed rate loans generally come with less flexibility than variable rate loans and often come with a cap and limits on the amount of additional cash you’re able to pay off your loan.  For example, you may be limited to two additional repayments a year and a cap of $10,000 in total on those repayments.

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