Invest or Offset? Where should your surplus cash go?
With home loan rates high, investment markets volatile and economic uncertainty continuing, many Australians are asking a simple question:
Should I put extra money into my home loan offset account, or invest it?
There’s no single answer, and for many people it may not need to be an either/or decision.
The case for your offset
When home loan rates are high, keeping surplus cash in a 100% offset account can be very effective. For example, if your home loan rate is 6.0%, keeping an additional $50,000 in your offset for a full year could save approximately $3,000 in home loan interest.
Importantly, you generally don’t pay income tax simply because you’ve saved interest on your private home loan. That combination of interest savings, certainty and access to your money can make an offset particularly attractive.
So why consider investing?
Investing serves a different purpose. For people with a longer timeframe, investing can help:
Build wealth outside the family home
Diversify your assets
Provide exposure to long-term capital growth and investment income
Take advantage of compounding over time
However, investment returns aren’t guaranteed. Markets can fall, sometimes significantly, so investing generally requires a longer timeframe and an ability to tolerate fluctuations.
It doesn’t have to be one or the other
For many people, the appropriate strategy might involve a combination of:
Maintaining a cash reserve for emergencies and upcoming expenses.
Using your offset to reduce non-deductible home loan interest.
Investing part of your surplus cash flow towards longer-term wealth creation.
The right balance will depend on your home loan rate, cash flow, tax position, investment timeframe, risk tolerance and financial objectives.
What does the right balance look like for you?
If you’ve built up money in your offset account or regularly have surplus cash flow, it could be a good time to review whether your money is working as effectively as it could be.
If you’d like to review your current position, we can help you consider the trade-offs between reducing home loan interest, retaining access to cash and investing for your longer-term goals.
Please don't hesitate to get in touch today to schedule a time to meet.
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