Applies to: Australia
A cascade puts everything into one offset until it covers that loan, then the freed money into the next. When your home loan or your investment loan clears, its repayment stops leaving your account, and that is usually far larger than the amount you were setting aside. This runs both orders month by month and shows when each loan goes, and what is free from that month.
| Taxable income | Tax on this income | Marginal |
|---|---|---|
| $0 – $18,200 | Nil | 0% |
| $18,201 – $45,000 | 15c per $1 over $18,200 | 15% |
| $45,001 – $135,000 | $4,020 plus 30c per $1 over $45,000 | 30% |
| $135,001 – $190,000 | $31,020 plus 37c per $1 over $135,000 | 37% |
| $190,001 and above | $51,370 plus 45c per $1 over $190,000 | 45% |
A loan does not just stop costing you interest when it clears. It stops taking a repayment. That repayment is usually several times the amount most people can set aside each month, and from the month it stops it is yours.
Both this page and the offset split calculator put that money back to work, into whichever offset still has room. The difference between the two pages is not the arithmetic, it is what they hold still: that page fixes the share and searches every split from nothing to everything, and this one fixes the order and shows you the months the money comes free on.
The offset fills. Your offset covers the loan balance, so the interest on it is zero. It cannot go lower, so another dollar in that offset earns nothing at all - not a poor return, nothing. Your contribution is freed. Your repayment is not. It still leaves your account, and every cent of it is now principal rather than interest, so it is not being wasted.
The loan clears. The balance reaches zero and the repayment itself stops. This is the larger of the two events, and it is the one that makes the next loan collapse quickly, because the next offset is now being fed your spare cash plus an entire mortgage repayment.
The freed repayment is only worth something if a loan clears while the other loan's offset still has room in it. If both offsets fill first, the interest on both loans is already zero and there is nothing left for the freed repayment to save. It still arrives on the month the timeline shows. It just cannot buy anything, and the finding above says so in those words when that is your situation.
The order can still be worth a great deal in that case, and on the figures this page loads with it is. Those two statements are about different things and it is worth keeping them apart. Which loan you attack first decides which offset holds your money for years before anything clears, and a dollar of interest saved on the two loans is not worth the same after tax. That difference is there from the first month, whether or not either loan ever clears. The freed repayment is a second effect stacked on top of it, and it is the one that can be worth nothing.
Clearing an investment loan quickly means deducting less interest, and the year-by-year table above shows exactly how much less. It is worth being precise about what that is: a smaller deduction is a consequence of owing less, not a cost of clearing the debt. Paying a dollar of interest to recover 39 cents of tax leaves you 61 cents worse off. The arithmetic does not have two sides to it.
The tax saved is treated here as reducing the cost of the interest, and nothing else. It is not modelled as being reinvested, because that would need a return assumption this page has no basis for.
The usual rule compares your home rate against your investment rate multiplied by one minus your marginal rate, because investment interest is deductible and home interest is not. That is a single-period comparison: it asks what one dollar saves you this month.
Over a long horizon it can reverse, and the reason is that the two halves compound differently. Interest saved in an offset compounds at the loan's full nominal rate, because the balance is lower every month afterwards. The tax discount applies only to the benefit, and it does not compound. So a dollar in the investment offset compounds at the investment rate and you keep the after-tax share of a growing number, against a dollar in the home offset compounding at the home rate and keeping all of a smaller one.
How long that takes depends steeply on the marginal rate, and the page states the crossover rather than a slogan. At a 15% marginal rate a 7% investment loan overtakes a 6% home loan in under two years, so the single-period rule is wrong for essentially the whole loan. At 39% the same two rates would take about 47 years to cross, which is longer than any mortgage, so the rule holds throughout. The figure above is worked from your own rates.
The cascade sharpens this, because the loan that goes first has its repayment freed sooner and that repayment amplifies whatever is attacked next. If the two orders below disagree with the rate rule, that is why.
Deliberately, so the timeline above means what it says:
The assumptions behind every figure: rates held constant, repayments unchanged, no lump sums, no fees, no rental income, no capital gains tax, and no reinvestment of either the freed money or the tax saved.