For high-income professionals in competitive sectors, managing substantial assets and navigating complex financial landscapes are part of the daily grind. An invaluable tool in achieving financial flexibility and long-term benefits is the strategic use of an offset account. Whether you are an executive considering career moves, planning future investments, or preparing for unexpected expenses, maintaining an offset account can be transformative.
Understanding Offset Accounts and Its Benefits
An offset account is a strategic financial tool that links to your home loan, directly reducing the interest you pay by offsetting the loan balance with the funds in your account. For example, if you have a $500,000 mortgage and $100,000 in your offset account, you only pay interest on $400,000. This setup saves you money on interest and opens up opportunities for more advanced financial strategies.
High-Earning Executives and Changing Circumstances
Financial stability for high-earning professionals can shift rapidly with career changes or personal developments. Whether it’s moving to a new role or managing unforeseen expenses, an offset account provides a financial safety net that ensures you can adapt without compromising your financial goals
Consider an executive transitioning to a new role and facing immediate real estate needs. Traditional banking might not fully accommodate such changes, especially when considering bonuses or variable compensation as part of income. While the salary might be substantial, the value of homes owned by executives often exceeds what a bank will lend based on salary alone. Many lenders rely on cash bonuses to assess lending capacity.
However, banks may not consider your cash bonus when changing jobs, drastically reducing your borrowing capacity. In such a scenario, having an offset account with existing lending could make all the difference. By not closing the loan facility when you have fully offset your mortgage, you maintain access to funds that could cover the shortfall when your salary alone isn’t sufficient to secure a new loan. This flexibility can be crucial in ensuring you don’t miss out on purchasing the home you want due to a temporary change in financial circumstances.
Recycling Debt: From Personal to Tax-Deductible Using Your Executive Share Scheme
One of the most compelling advantages of an offset account is converting personal debt into tax-deductible debt. For executives receiving shares through an Executive Share Scheme, this strategy can significantly reduce your tax burden. By leveraging your offset account, you can transform non-deductible home loan debt into a tax-efficient structure, saving thousands in taxes and optimising your overall financial plan
Imagine you’ve accumulated substantial shares through an executive share scheme and have funds available in your offset account. You could use these shares to convert your non-tax-deductible home loan debt into tax-deductible debt, potentially for your spouse. This strategy can reduce your overall tax burden, as the interest on a tax-deductible loan is deductible against your taxable income, effectively lowering the cost of borrowing.
However, if you had repaid your loan instead of maintaining an offset account, this opportunity might not be available. Drawing additional funds from a repaid loan typically requires approval from the lender, and you may only be allowed to withdraw a nominal amount. By keeping your offset account active, you preserve your ability to leverage this strategy, potentially saving thousands in taxes.
Managing Unplanned Expenses
Life’s unpredictability often requires quick financial responses, whether it’s addressing sudden property needs, helping a family member, or seizing an unexpected investment opportunity. An offset account provides a readily available source of funds without the need for lengthy approval processes, which can be crucial in situations where time is of the essence.
For example, you might find yourself needing to purchase a new property unexpectedly. With an offset account, you have the flexibility to access the necessary funds immediately, without the need to take out a new loan or disrupt your existing financial arrangements. Similarly, if a family member needs financial assistance, you can provide support without compromising your financial stability. The same applies to unexpected investment opportunities; having accessible funds means you can act quickly and potentially capitalize on a profitable deal.
Potential Risks of Not Maintaining an Offset Account
Failing to maintain an offset account or closing a loan facility once it’s fully offset could lead to missed opportunities and financial setbacks. You might find yourself unable to purchase a desired lifestyle asset or investment property because you lack the necessary funds at the right time. Additionally, without the flexibility that an offset account provides, you may miss out on tax-saving strategies like debt recycling, which could have long-term consequences on your financial well-being.
Optimising Your Financial Flexibility
For high-income executives, the next steps are clear:
- Check if your loan offers an offset account facility. If you don’t already have one, consider setting up an offset account to maximise your financial flexibility.
- If you are currently repaying your loan, consider building cash in an offset account instead. This approach provides future flexibility while still reducing the interest payable on your loan.
- Have your loan reviewed regularly. Ensure that your loan structure aligns with your long-term financial goals and takes full advantage of the benefits that an offset account can provide.
In the fast-paced world of executive financial management, maintaining flexibility through tools like offset accounts is crucial. They not only reduce your interest burden but also equip you with strategic advantages essential for navigating complex financial scenarios.
For personalised advice on how to best utilise offset accounts and other financial strategies, contact us for a free discovery call. We can help you tailor your financial plan to meet your unique needs and ensure that you’re prepared for whatever the future holds.
Contact James Marshall at +61 (0) 7 3007 2080 or email contact@executivestrategies.com.au for a personalised consultation.
Executive Strategies is a specialised information hub for executives and senior managers who may have founded their own business or who work for growing private, ASX-listed companies or government businesses. Its purpose is to provide access to specialist advisers and information that addresses the often-complex issues affecting their personal prosperity.
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