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Before building or selecting a property to invest in, it is important to determine what your investment ‘gearing’ strategy is. This is where an understanding of whether your home is positively geared (a cash-flow property strategy) or negatively geared (a capital growth property strategy) becomes significant.
For a better understanding of what these terms actually mean, we have compared the two strategies and outlined the benefits and drawbacks of each. Consider both carefully before purchasing your investment property!
Generally considered the safer, more conservative method, positive gearing occurs when the rental income on your investment property exceeds the cost of maintaining it, including loan repayments, interest, rates and maintenance fees. Positive gearing allows for short-term profit, as the extra cashflow works as an additional income stream. Positive gearing works in areas where rental demand is high (so investors can charge higher rent) and when interest rates are low.
Negative gearing occurs when the property runs at a loss – that is, the rental income is less than the costs of maintaining the home. Investors will need to use their own funds to make up the shortfall. Ideally, a negatively geared investment will grow in value over time, and the increased profit from selling it is expected to outweigh the initial financial losses. Negatively geared homes are often located near capital cities, which generally perform better and increase in value over a longer period.
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*Hotondo Homes is not an authorised financial adviser so please seek professional advice for your investing enquiries
An offset account works in the same manner as your everyday banking account with one crucial difference – the balance is offset daily against money you owe on your loan, which reduces the amount of interest you pay.
A reduction in interest means you can pay off your loan quicker. For example, if you have $10,000 in an offset account and you have a $300,000 home loan, you will only pay interest on $290,000. Using this calculator you can see if the interest rate is at 5%, you could save $18,357.69 in interest and cut 1 year and 8 months off the length of a 30 year loan.
Because the money in your account is offset daily against your loan balance, the longer you have money in your account, the more you will save on interest.
There are a few questions that are often asked in relation to offset accounts.
Why not save the money in a high interest account instead?
In almost every case, you will never earn more interest in a savings account than what you are paying in interest on your home loan. Interest earned in a savings account also needs to be declared to the tax office, and tax must be paid on it. Your money will be working much harder for you in an offset account.
Why not put the money straight on the mortgage?
There are benefits to keeping money in your offset account rather than putting it straight on the mortgage. Funds in an offset account can be used like your everyday account. If you have an emergency, or you may be saving for a holiday, it is easy to withdraw funds as necessary. If you put it all on the mortgage, then find you need the money down the track, you may be hit with redraw fees or minimum redraw amounts.
Having a decent amount of savings in your offset account can cut years and thousands of dollars from your home loan. It also offers comfort in the knowledge that you can access these funds at any time, with no issue.
Always beware of extra transaction charges that may surround offset accounts though. It is best you do your research and speak directly to your bank regarding these accounts being used to pay your mortgage faster.
*Hotondo Homes are not financial experts. You should always seek independent legal advice when looking to reduce the amount of your mortgage with an offset account.