What suits you? Offset accounts vs redraw facility
One of the many options to consider when comparing a mortgage product is whether to choose a product with an offset account or redraw facility – so what is the difference between the two?
Both offset accounts and redraw facilities allow you to utilise your savings to reduce the ‘loan balance’ that the bank uses to calculate your monthly interest cost and hence for you results in lower interest repayments each month.
The differences however lie in the way they operate, flexibility, fees and tax implications.
Offset accounts
An offset account is a normal day to day transaction account which has an offset feature – this means that it operates like a typical savings account where your funds are easily accessible. You are able to have your employer deposit your income into it, set up direct debits and transact your everyday spending and bills through ATMs and a debit card. What makes it special is that it is linked to your mortgage and allows the balance to be offset against the loan. The interest payable on your loan is then calculated only on the difference between the two – i.e. interest is calculated daily on the net loan balance and accumulated at the end of the month to form your monthly interest repayment (or fortnightly depending on your loan repayment cycle preference). Effectively you are only paying interest on the amount of money you use. Any other savings should be retained in the offset account which will be working overnight to save you on your mortgage interest cost.
Redraw facility
In contrast, a redraw facility is not a separate account. It is merely a feature that is attached to your home or investment loan. All extra repayments above your scheduled contracted loan repayments is retained in your loan account and can be redrawn out at a later date to a daily transaction account. Redraw facilities are usually not as flexible as offset accounts. Depending on the provider some lenders may set minimum redraw amounts, maximum times you may redraw in a year, fees for each redraw transaction or you may not have the option to redraw through an ATM or transact using a debit card.
Tax implications
There may be different tax implications with withdrawing money from your redraw as opposed to using the funds in your offset account. Redraws are effectively new borrowings from the tax purpose point of view. Hence if you redraw money from an investment loan for non-investment purposes the interest on that amount will no longer be tax deductible. Similarly if you decide to rent out your home in the future, the interest charged on the loan may be tax deductible however you may not be able to claim any portion the loan for private use such as holidays or cars. On the other hand, using money from an offset account will not affect your tax deductibility on the loan interest.
Keeping in mind what works for one person may work entirely differently for another! Please contact one of our Lending Specialists on (03) 9835 8200 for further information on the best option for you and your position! Alternatively, you can complete your details below and we’ll be in touch. We look forward to hearing from you!
