Redraw Vs Offset

It is clear that putting extra money into the home loan is one of the best way to save; be it for kids’ education, holidays or just chipping away the bad debt quicker.

However, when it comes to choosing between the redraw or offset facilities, the choice may not be that simple.

On the surface, the redraw and offset facilities both provide similar outcomes.

They offer you the ability to use your extra income or savings to reduce the interest payable on your loan. However, they do so in different ways and have unique features that suit different needs.

 

Offset facility

Money sitting in an offset account remains at call and easily accessible. This is often a normal transaction account that is linked to the loan.

Some providers can offer multiple offset accounts to one loan. This can allow people to use the various offset accounts to save up for different goals; and in the meantime, reduce interest charged on the loan.

However, money in the offset account does not reduce your loan balance, but reduces the interest charged as the calculation is based on your loan balance less the amount in your offset account.

 

Redraw facility

Money in a redraw facility reduces the actual loan balance and there are often restrictions on how you access them. Some providers may set minimum redraw amounts or may charge fees on each withdrawal.

Additional voluntary loan repayments will be automatically deposited into the redraw facility.

For people with multiple loans, the redraw facility is an uncomplicated system of allocating extra repayments.

The restricted access also serves as a deterrent against uncontrolled spending.

However, as the loan balance is reduced, care must be taken when funds are withdrawn as there can be tax disadvantages if you have an investment loan or decide to make your family home an investment property in the future.

 

Here is a case study to illustrate the point.

Angela bought her first home with a loan of $300,000 many years ago. As she has been diligent in making extra repayments into her home loan account, her current loan balance is $50,000. With the equity that she has accumulated, she has decided to purchase a bigger house that requires her to borrow an additional $450,000. She can then rent out her existing home and claim the interest paid as a deduction. However, as the loan has been reduced to $50,000, she can only claim interest on the $50,000; while her bigger debt of $450,000 is now the non-deductible bad debt.

If she had used an offset facility at the start, she could have taken the $250,000 extra repayments to reduce the amount that she needed to borrow on her new house. This would reduce her bad debt to $200,000. Also, as her existing home loan balance has not been reduced, she would be able to claim interest on the full $300,000 as a deduction.

 

While many people may not keep their family home as an investment property, it certainly is a pity to be forced to sell due to the tax disadvantage created.

For the disciplined savers, it may be worth considering the offset account to ensure that all options are available to you when the time comes.