Let’s look at some statistics. 67% of adult Australians are owner-occupiers of their own home. 8% own an investment property. Relatively few of these investors own more than one investment property. The average time owner-occupiers spend living in a particular home is ten years. The average age for buying a first home is 34. This last statistic which is yet another reason why young people should see financial advisers; 34 is way too late. Taken together, these numbers tell us that:
- Most people who buy a first home will buy at least another four across their lifetime, making five purchases altogether;
- One in every eight homeowners is likely to be a property investor as well (experience tells us that very few property investors do not own their own home as well); and
- Taken together, this means that the average Australian property investor buys six properties across their life, but never hold more than two at a time (the one they live in and a single rental property).
So, in many cases it makes sense for financial advisers to combine these observations and show clients a simple way to simultaneously move house while also acquiring at least one investment property.
A simple way to do this is via a mortgage offset account. Suppose a couple has $100,000 in cash and buys a property to live in worth $500,000. They use $50,000 cash as a deposit and borrow $450,000. The additional $50,000 in cash goes into an offset account. Immediately, this reduces the amount that they are paying interest on to $400,000. Over the next few years, they simply pay interest on the loan account. They save $200,000 into the offset account. Effectively, then, they have reduced their debt to $200,000. This is the amount they pay interest on.
The couple moves house a little earlier than average. After five years they decide to buy another home and keep the first one as an investment. They use the $250,000 in the offset account as a deposit on the second property and borrow the rest (with another associated offset account, with which they can repeat the transaction if they wish). They are now paying interest on the full $450,000 borrowed in the original loan. This loan was taken out to buy the first property. Because this property is now rented, and rent is assessable as income, the interest paid on this loan of $450,000 is now tax deductible. The $250,000 in cash has been used to reduce the amount they needed to borrow to buy the second property, the interest on which would not be tax deductible.
You can see, then, how the offset account has the effect of letting the couple move equity from the rental property to their own home, but without needing to transfer title, incur stamp duties, etc.
Over their lifetime, this method allows the couple to only buy five houses, as against the average six purchases, while still holding the home they live in and an investment property. This reduces the amount spent on housing by one-sixth, but leaves the client in the same wealth position. This is a pretty nifty result.