For high-income professionals in the mining and resources industry, financial planning often involves managing substantial assets and navigating complex scenarios. One tool that can provide significant flexibility and long-term financial benefits is an offset account. Whether you’re a mining executive considering a career move, planning for future investments, or preparing for unforeseen expenses, maintaining an offset account could be a game-changer.
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 not only saves you money on interest but also opens opportunities for more advanced financial strategies. (Home loan redraw and offset account, are often misunderstood – you can read more here).
High-Earning Executives and Changing Circumstances
For high-earning professionals in the mining and resources sector, financial stability can shift rapidly with changes in career or personal circumstances. 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 a high-earning mining executive who decides to change employers and needs to purchase a new home. 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, when changing jobs, banks may not consider your cash bonus, drastically reducing your borrowing capacity. In such a scenario, having an offset account with existing lending in place could make all the difference. By not closing the loan facility when you’ve 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 that 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 the ability to convert 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 you 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 if you were to transfer the ownership of these shares to 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 to you. 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 is full of surprises, and not all of them are pleasant. Whether it’s an unplanned property purchase, assisting a family member, or seizing a sudden investment opportunity, having quick access to funds can be invaluable. 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 own financial stability. The same applies to unexpected investment opportunities; having accessible funds means you can act quickly and potentially capitalise 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 professionals in the mining and resources industry, 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’re 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 a sector where financial circumstances can change rapidly, maintaining flexibility is key to optimising your financial outcomes. Offset accounts offer a practical solution that not only reduces your interest burden but also provides strategic advantages that can be crucial in navigating the complexities of high-income financial planning.
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 Brett Cribb at +61 (0) 7 3007 2080 or email contact@executivestrategies.com.au for a personalised consultation.
You can also read more about Offset Accounts HERE.
*Note: For services not covered under the Fortnum Private Wealth AFSL, we collaborate with qualified professionals to provide comprehensive advice tailored to your specific needs. Resources Unearthed is a solutions hub that connects senior executives, established professionals, and business owners in mining and resources with proven specialist advisers.
