Finance Battle: IP Offset VS HISA

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If you don't have an PPOR Offset, you might be tempted to use your IP Offset. 

But as an IP offset is against an IP and not a PPOR, the interest saved is indirectly taxed. So the benefit is minimal.

In addition to this, the IP offset often locks the 'saved' interest into the mortgage where it is unable to be extracted for a future PPOR purchase. And as the full 6% saved is locked in, the additional tax comes from your savings, and so this approach certainly speeds up paying off the IP at the expense of your savings and future PPOR.

Lets assume you want to put $10k into either option. 5.5% HISA, 6.3% IP Mortgage.

HISA

- MTR 32% = $10,000 x (5.5% x (100% - 32%)) = $374

- MTR 39% = $10,000 x (5.5% x (100% - 39%)) = $335.5

- MTR 47% = $10,000 x (5.5% x (100% - 47%)) = $291.5

IP Offset

- MTR 32% = $10,000 x (6.3% x (100% - 32%)) = $428.4

- MTR 39% = $10,000 x (6.3% x (100% - 39%)) = $384.3

- MTR 47% = $10,000 x (6.3% x (100% - 47%)) = $333.9

Cashflow

Now the catch is the IP offset savings generally do not reduce the repayments. Thus the savings are stuck in the mortgage, and can no longer be used for a future PPOR. On top of this, the full 6.3% is stuck there, meaning we need to find enough to cover the tax bill from our savings.


So from a cash flow point of view, HISA nets us an extra:

- MTR 32% = 374 + 10,000 x 6.3% x 32% = $575

- MTR 32% = 335.5 + 10,000 x 6.3% x 39% = $581.2

- MTR 32% = 291.5 + 10,000 x 6.3% x 47% = $587.6


PPOR Payback

We can now put that cash towards a future PPOR which gives us a tax benefit. The pay back for the lower rate is (assuming 6.1% PPOR):


- MTR 32% = (428.4 - 374) / (575 x 6.1% x 32%) = 4.8 years

- MTR 39% = (384.3 - 335.5) / (581.2 x 6.1% x 32%) = 3.5 years

- MTR 47% = (333.9 - 291.5) / (587.6 x 6.1% x 32%) = 2.5 years


Absolute Terms

But lets just remember how much money we are talking here. The difference on $10K is about $50, so just go HISA. The PPOR Payback doesn't matter until we are talking $200K+ and/or many years. And when it does get that big, if you plan to buy a PPOR again HISA wins.


Interest Only

If your offset reduces repayments then ignore what I've said above, and just use the offset. The rate is still crap, but at least you don't lose access to the cash.

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