Home Loan 101 Question

Letrxnox on 11/10/2019 - 13:27

The more I research, the more I get confused.

1) Nowadays online banks that provide lower than 3% (not offset acc) are considered as redraw account correct?
Is this account's terminology same as "redraw facility" account? which is where you repay more than you should, but later can withdraw for a reason?

2) Why ozbargainers here insist offset account is better against redraw if offset account provides a higher interest rate in general?

How does the math check out? Suppose you loan 500k home for 3.2% interest (offset) or 3%(non offset).
You put 50k in the offset acc. and your repayment will be 450k against 3.2% interest. With redraw, whether you pay monthly required amount or make more repayment will be charged against 3%

3) I am planning to buy 1 bdr apartment, live there for a bit (from 6months-2/3yrs) max and turn this into investment property. With this scenario, which is better off? Offset or Redraw? What happens with tax before and after turning into investment?

4) When turning into investment, do I have to declare to the bank that I need to switch the home loan into investment? Will there be switch fees for this?

Thank You

Financial Home Loan

Comments

  • spal on 11/10/2019 - 13:48

    Offset accounts work differently to redraw accounts.

    Offset: All money goes into your savings account. You use your credit card for your regular living expenses. When your credit card bill is due you pay it out of your savings account. If this savings account is the linked offset account with your home loan, you don't pay interest on the amount in your savings account. Home loan interest charges are calculated on a daily basis. Over a period of time this small saving adds up.

    Redraw: You save money and pay additional amounts into your home loan account directly. Whilst this amount is being saved and sitting in your savings account you are paying interest on this amount in your home loan account. Also, redrawn is not a simple process. You will have to make a short application to the bank, give them a reason why you need the funds. Generally, there aren't any issues, but bank could refuse your redraw application, because it is seen as new lending. Some banks are known to charge a redrawn fees. Also, it has usually about two day turnaround time.

    Having said that, interest charges on accounts with no offset, but with redraw facility are usually lower. Maybe, it is a good idea to have a smaller loan amount with offset facility and the larger loan with no offset, but redraw facility .

    Hope this helps.

    • Shadowsfury on 11/10/2019 - 13:59
      +4

      The above is good but one key point is missing regarding tax deductibility, which given you want to turn the property into an IP down the track you should look into offset instead. In short, any money you overpay into the mortgage and then withdraw, may no longer attract tax deductions, depending on what you use it for.

      Using your numbers:
      Offset - $500k loan, $50k extra for offset. Buy a $50k car in cash - full $500k loan still deductible
      No offset - $500k loan, $with additional repayments of $50k. Buy a $50k car in cash - now only can deduct interest off $450k.

      • jjjaar on 11/10/2019 - 15:08

        Questions to those that know more…

        Is another important to consider the interest rate differences between the two?

        That is, is the redraw only going to save you $2000 a year now in interest over that with the offset?

        How much will you save in the future on that extra $50k as a tax deduction?

        Wouldn’t it be better to save more money now vs guessing what may happen in the future?

        • ESEMCE on 14/10/2019 - 07:55
          +1

          Is another important to consider the interest rate differences between the two?
          It's one of the factors to consider

          How much will you save in the future on that extra $50k as a tax deduction?
          Depends how much you earn…

          Wouldn’t it be better to save more money now vs guessing what may happen in the future?
          Depends on your confidence level of your plans for the future.

    • ESEMCE on 11/10/2019 - 14:08

      Nah,
      Redraw and offset in "modern" accounts like ING Mortgage Simplifier are for all intents an purposes identical in terms of the benefits of decreasing the amount against which interest is calculated with a few caveats.
      (Redrawing from Mortgage Simplifier is complicated solely by the requirement that you can only redraw cash to your linked account. If your Linked account is also an ING Account, then the transfer is instantaneous. If it is with another institution, then there will be delays to access your redrawn funds)

      The Key difference will impact you only if you are buying as an investment or change from a Place of residence to an investment.
      An offset account being a different account makes calculating deductions easy as any interest you pay in your mortgage account is deductable.
      In a redraw account, any interest payable as a result of making a redraw is not eligible for deduction (unless you can show the redraw was made for the purpose of another investment)

    • OzBrogains on 20/10/2019 - 00:26

      What bank asks for a “reason” for redrawing?

  • arkie0 on 11/10/2019 - 13:57

    1. Yes

    2. Redraw and offset are identical from an interest saving point of view.

    From the bank's point of view (which is why they charge higher interest or a monthly cost), an offset may cost them additional because they have to give you 2 accounts, the loan account and a transaction/offset account.

    From your point of view, the offset is better because it is used for tax purposes to reduce/remove loan contamination.

    1. General answer in this case is offset is better.

    2. No, you don't have to tell the bank anything.

  • rheem on 11/10/2019 - 14:09
    +1

    If you're thinking about turning it into an investment in the future and you think you'll be able to pay extra off then you probably want to go with an offset for future tax reasons, an offset and redraw are assessed differently.

    Let's say you have a $500,000 loan and after your 3 years you've managed to pay $100,000 extra into your redraw, you then change the property to an investment leaving $400,000 owing to which you can claim as tax-deductible. If you then wanted to redraw that additional $100,000 from your loan to purchase a new property, you can't claim that additional $100,000 as tax-deductible unless it is used for another investment - the ATO considers it a non-taxable loan. Not only that but you now have a loan for $500,000 of which part is tax deductable and part is not which is a pain for your accountant.

    If you had an offset and did the exact same thing you'd be able to claim the full $500,000 as tax-deductible after you withdraw your additional $100,000. You don't end up with a mixed loan

    This is probably the one thing I wish I knew when I bought my apartment.

    I'm not an accountant so make sure to do some research and speak to experts.

  • Pandaboss on 12/10/2019 - 10:09

    I have a home loan with offset account and free redraw.

    I put my savings into the actual loan account and not one of my linked offset accounts.

    Will it still be the same interest charged if I transferred the money out to the linked offset account?

    My understanding was that it would still be the same amount being charged.

    • Ughhh on 12/10/2019 - 12:19
      +1

      The offset account offsets the interest of the balance, as if you put the money in the actual loan account. Both gives same results. Main benefit of having offset is for tax reasons in the future.

      • Pandaboss on 12/10/2019 - 18:48

        Great, I just wanted to double check. Thanks for that.

        I'll have to read up more about the tax side of having the offset account soon. Sounds like any OzB would utilize this. :)

        • ESEMCE on 14/10/2019 - 08:00

          You can only claim tax if the property is a rental or you're using it for running a business.
          If you live there, you can't claim on tax.

          • Pandaboss on 14/10/2019 - 08:37

            @ESEMCE: -So I'll need to move out of my place.
            -Transfer my savings from home loan into my offset account.
            -Get tenants in for rental income.
            -Claim tax deductions on home loan interest charges, W/O My savings.
            -Still have the benefit of the loan offseted and reducing interest charged.

            Would it be good to take all savings or leave some of it in the loan? Actually probably take it all because then the full loan is tax deductible.

            • ESEMCE on 14/10/2019 - 11:19

              @Pandaboss: Nope…
              1) you need to see an accountant.

              You're already stuffed on the money paid into the the redraw.
              You can't redraw into a savings (offset) account and claim the resultant interest as a deduction.

              You can only claim the interest arising from a redraw where you can demonstrate that the redraw was made towards another investment.

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