Offset accounts and Redraw are some of the popular features you can consider when choosing to obtain a loan. They both work to reduce the interest paid over your loan’s life span ultimately helping you repay your home loan or investment property loan sooner!
So, how do they work and what can they do for you?
Offset accounts are separate accounts that attach to your home loan. They are fully transactional, so you can have a debit card attached to them and use it to withdraw money from an atm or Bpay, and have your salary paid into it.
The money in your offset account can be used for your everyday spending and will work to reduce the amount of interest that you pay on your loan. For example, if you have $300,000 owing on your mortgage and have $50,000 sitting in your offset account, you would only pay interest on the net of the two (in this case, $250,000). Although you do not earn interest on the money sitting on your offset account, you do save on interest expense.
Some banks will allow you to have multiple offset accounts, so you could potentially have some savings sitting in one account, your everyday bills in another, and yet another for your holiday plans. If you are interested in learning more about multiple offset accounts, you can learn their pros and cons here.
Redraws are not separate accounts, but instead, a feature usually attached to your variable rate home loan. They allow you to pay extra into your loan to save a buffer on top of your loan’s minimum repayments. You can then pull that “buffer” money back out again if you so desired.
Having a Redraw isn’t as flexible as having an Offset account. Using a credit card or withdrawing money from an atm may not be possible, restricting its transactional ability. Bank fees and minimum redraw amounts might also apply, stopping you from withdrawing out small amounts of money.
If your property is an investment property, or you are planning to turn your existing home into an investment property in the future, there are important tax implications that you should keep in mind. When renting out your existing home, the interest on that loan becomes tax-deductible. However, if you access the money in your Redraw for non-investment purposes (like going on holiday or buying a car, or just using the funds for everyday living expenses) those funds that you draw back out are not tax-deductible, which can make things really messy when tax time comes around! Offset accounts might help keep things clearer come tax time without affecting the tax deductibility on your loan.
Ultimately we suggest you think really carefully about whether or not redraw is offset or offset is better for you, and you seek some professional advice from a qualified mortgage broker who has your best interest at heart, and potentially from your accountant, so you can make an informed decision with regards to which one will suit your current situation the best!
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