Mortgage offset versus mortgage redraw-many homeowners are unsure which option is better. Any way that home loan customers can reduce the principal on their home loan will help bring down interest costs and put a bigger dent into their mortgage, but experts say the two types of facilities serve different purposes.
Offset accounts/facilities are used as daily transaction accounts and the balance is taken off the total loan amount, which reduces the daily interest charges. Offset accounts are separate accounts “linked” to your mortgage account that save you interest on your depending on how much is in your offset account balance, as am example if you had a $100,000 loan with an offset balance of $20,000 then interest on your loan would be based on an outstanding balance of $80,000.
Redraw accounts hold extra repayments made on a loan and help create a buffer. However, they are not as easy to access because there is no card linked with this facility. Redraw accounts are where, upon making additional payments into your loan over and above the minimum, you can gain access to or “redraw” those additional payments at any time. Interest is calculated on the lower balance so if you had a loan balance of $100,000 and paid a lump sum of $20,000 into it, the balance would be $80,000 with $20,000 redraw and interest charged on the new balance.
In both examples above the interest is charged on $80,000 with the $20,000 being accessible either in the offset account or as redraw. The main difference between the two is how the ATO views each set up.
In offset accounts/facilities any withdrawals you make from an offset account will not affect tax deductibility on the overall amount of your interest expense. With the offset account your loan balance is preserved at $100,000 because the offset account is separate from the loan. Thus, from the above example if you withdrew the $20,000 from the offset account the loan balance is still $100,000, regardless of how much is in the offset account. This means that if the loan is tax deductible then you are preserving the tax deductible debt by storing your additional funds or savings in the offset account.
In a redraw, if you redraw money for non-investment purposes then the interest expended on that amount is no longer tax deductible in the eyes of the ATO. In the case of the loan with a redraw facility the balance is physically reduced to $80,000. The ATO views it as a lump sum repayment, so if the $20,000 is redrawn from the account and the loan is tax deductible then the deductibility only applies on the $80,000, unless the client can show that the $20,000 is used for the same deductible purpose as the original loan (i.e. if these funds were for repairing an investment property when the original loan was for the purchase of this property).
The National Australia Banks‘s general manager of consumer, Melissa Reynolds, says both types of home loan facilities can be a great way for savvy customers to reduce interest costs.
“An offset gives you day-to-day access to your funds. For example your pay and the daily balance in your offset are then offset against your home loan,” she says.”The reason a redraw account becomes more popular is because customers like to think they are building up the equity in their home loan and keeping it separate.””Because you have to access your redraw amount and then move it into your transaction account or other account and access that money through an ATM, then you are less likely to eat into that equity and into those funds.”
As each individual’s specific situation is different, it’s always worth speaking with a finance professional with regard to any queries you may have. With this in mind, please don’t hesitate to get in touch with the team at Fortis Accounting Partners for more information on offset accounts and redraw accounts.
