ETFs vs. offset accounts: When to move money?

Question

I currently hold ETFs and have funds in offset accounts. Ignoring market fluctuations and tax implications, at what point does it make sense to shift money between the two?

For example:
- If interest rates are very low, I assume ETFs are the better option.
- If interest rates are high, it seems smarter to focus on offsetting loans.

Is the math as simple as ETFs returning ~7%, so you’d start selling once interest rates cross ~6%, given the higher risk of ETFs compared to loan savings?

Would love to hear your thoughts!

Answer

You’ve touched on a key consideration in personal finance: optimizing the allocation of your funds based on the return and risk associated with different investment vehicles. The decision to shift money between ETFs and an offset account can indeed be influenced by the prevailing interest rates, among other factors.

Comparing ETF Returns and Loan Savings

The basic math you’ve outlined is a good starting point. If ETFs are expected to return approximately 7% annually and your mortgage interest rate is around 6%, the decision might seem straightforward. However, there are a few additional layers to consider:

Risk and Return: ETFs, while potentially offering higher returns, come with market risk and volatility. The returns are not guaranteed and can vary widely year over year. In contrast, money saved on mortgage interest by using an offset account is effectively a risk-free return. You are guaranteed to save on interest costs equivalent to the mortgage rate.

Liquidity: ETF investments are generally more liquid compared to the money in an offset account, which is tied to a mortgage. This means if you need cash quickly, it might be easier to sell off some ETFs.

Interest Rate Fluctuations: If interest rates rise, the savings from an offset account become more valuable. Conversely, if rates are low, the potential higher returns from ETFs might be more attractive.

Financial Goals and Time Horizon: Your personal financial goals and the time horizon for those goals also play a crucial role. If you are aiming for long-term growth and can tolerate volatility, ETFs might be more appealing. If reducing debt and saving on interest is a priority, especially in the short to medium term, focusing on the offset account might be better.

Practical Strategy

Given these considerations, the decision isn’t always as simple as comparing the numerical returns. It’s also about your comfort with risk, your financial goals, and your need for liquidity.

A balanced approach might be beneficial. For instance, if interest rates are moderately high, you could allocate a portion of your funds to the offset account to guarantee savings on interest, while still maintaining some investment in ETFs to capture potential market gains. This diversification can help manage risk while aiming for growth.

How Pearler Fits In

With Pearler, you can manage your investments in ETFs efficiently, tracking your portfolio performance and adjusting your investment strategy as needed. Pearler’s tools can help you analyze how your ETF investments are performing in comparison to the interest rates on your mortgage, aiding in making informed decisions about where to allocate new funds or whether to shift your current investments.

In summary, while there’s a basic mathematical approach to deciding between ETFs and offset accounts based on interest rates and expected returns, incorporating considerations about risk, liquidity, and personal financial goals will provide a more comprehensive strategy. Pearler can support you in monitoring these variables and adjusting your portfolio accordingly.

You can find out more about this topic here: Hannah Richards Wealthy Empath

Disclaimer

I am an AI-powered chatbot and not a financial advisor. The information provided is for educational and informational purposes only and should not be considered as financial advice. Investing involves risks, and past performance is not indicative of future results. It is important to conduct thorough research and consider your own financial situation and risk tolerance before making any investment decisions. It is always recommended to consult with a qualified financial advisor or professional before making any investment decisions.

Answer

You cant ignore Market fluctuations and tax Implications it’s better to have a set percentage of your net worth in either or as if you are investing for long-term removing and adding capital from ETFs can reduce the compounding profits and buffers they create. Fundamentally you are correct, however the markets are not so Simple and require deep understanding As they are complex systems. And what you’re trying to do is predict and react off Central bank rates which even the best economist struggle with. I hope this gives some insight

Answer

Hi Isabella, great question.

I wrote about this in the following article, since there are a few ways to look at the options including something most people forget: https://strongmoneyaustralia.com/mortgage-vs-...

Typically yes, when rates are low, paying down debt is less attractive.  But low rates also push markets and asset prices up, so if you wait for rates to be low, then prices will already be higher to account for low rates, meaning returns from there may be lower.

I definitely don’t think selling makes a lot of sense, remember you are possibly going to lose a big chunk of money to capital gains tax.  So rotating your money from ETFs and offset accounts is not only going to result in a bunch of taxes, but it’s also going to be playing a timing game to some extent, which often isn’t that sensible.

The article explains more including how to tailor it to your situation – all the best.

Answer

I think there is confusion between offset and redraw. Offsets are very liquid, like a debit card. Redraw are less liquid requiring bank lending department involvement and they also have tax implications. Offset accounts you can withdraw from any time whether the purpose of the loan was tax deductible or not.
ETFs have tax implications if they pay dividends which are taxed, maybe less so for Australian ETFs with franking credits. If the offset is against a tax deductible investment loan, then holding money there reduces the tax deduction effectiveness.

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