Hi All,
So I am in the midst of refinancing at the moment and new lender offers offset at $10 per month, previous lender I was using redraw but always felt a bit insecure due to using offsets previously (even though not a huge sum).
Questions is, would you pay the premium ($10 per month) for a offset vs having a free redraw facility? and why if so? Just piece of mind?
Offset is a separate account and you are not 'paying' off the loan. Your bank can allow/deny the redraw but the money in the offset is not theirs.
Also, there is a huge difference from Tax perspective if your want to make your home as an invest later.
Also, there is a huge difference from Tax perspective if your want to make your home as an invest later.
How is an offset better than a redraw for investment purposes? I'm in the process of refinancing too but for an investment property since i still live at home.
The interest of a home loan is higher with an offset than a redraw facility so i was thinking of going the redraw route.
It comes into play when a PPR is used as an investment property. ATO likes things neat so if you use an offset account, they can easily see how much of your loan is remaining.
IIRC, with a redraw, you're only allowed deductions on interest paid for the lowest remaining balance you've ever had (i.e. so if you have been diligently throwing money into your loan and say had $20k left and then decided to buy a new PPR and rent out your previous property, as an investment, after you take money out of your redraw to finance the new property purchase, you would only be able to claim deductions on the interest that $20k would incur.
But I'm not a tax accountant… it's been a lot of years since it was explained to me and all I do is remember to always go for an offset account on my PPR and if I get a redrawn on my investment loans, to never put extra repayments in there (but extra money should go into the PPR first and foremost).
Use of funds is what causes the deductibility of interest.
Basically with a redraw, if you use the funds for non-deductible purposes, ie not related to your investment property, or other tax deductible uses, the interest would not be deductible for those funds. Calculation then gets messy, particularly if you do this a lot.
With an offset account, the interest is reduced by having the other funds offsetting the loan balance, however a repayment to the loan hasn't been made. As such you can do what you want with the funds in the offset account and there is no tainting of the deductibility of the loan, so interest remains deductible.
happy in the that if I need that money back, I can access it.
Got to be careful if you're relying on a 'redraw'. Your bank/financial institution may freeze your ability to redraw from the loan at any time.
Except they never have, and your redraw is essentially protected by default while if your bank goes bust you’ll be relying on the government guarantee to get your money back.
I think in a scenario where either happens money would have to be meaningless already.
The worst that ever happened was when Me bank and CommBank accidentally failed to ensure people with large available redraws were paying down the loan the same as if they had an offset and they (particularly Me bank) did a shit job of communicating that they were fixing an error that inflated people’s available balances, not taking people’s money. In the end they reversed that leaving many people tens of thousands of dollars more available than if they had used an offset.
Except they never have….
Sounds like ANZ and the major banks did restrict the customers' ability to redraw during covid where they took up the option to defer their mortgage payments.
https://www.bankingday.com/major-banks-face-possible-backlas…
…your redraw is essentially protected by default while if your bank goes bust you’ll be relying on the government guarantee to get your money back.
Why would the redraw amount be protected by the government? Having an amount available for redraw means there's a 'net mortgage' amount owing to the bank. So if the bank goes bust, the bank doesn't owe the mortgagee anything.
I doubt this is any different than an 'offset'.
You may find that your ability to withdraw any funds from your offset account is restricted if you fall behind in your mortgage payments.
I personally only have a 'redraw' and maintain my everyday transaction account with a different financial organisation.
It's only a 1 day turn around on transfering funds back from redraw to transaction. And I've never needed money faster than that.
Personally I prefer the offset account
Its much more flexible.
You can still move "excess" funds intoi the loan and use redraw if you suddnely need it
Just make sure
a) it is 100% offset. Not partial
b) Its free. Not many banks charge for an offset account so look around
pay for offset? wtf no?
alot of the new products dont have an annual fee but either charge for a offset facility or dont have one at all.
You either paid for it already through annual or monthly fee or higher interest rate. Banks don't offer offset for free ever since.
Another downside with redraw is that it is actually the banks money, and in the past some banks have taken this money away from customers, (though have given it back).
There are tax considerations/implications in using redraw if you ever plan to lease it out.
And this is my primary concern, I cannot rely afford for that money to be taken away. Could the banks do it now given the current climate with interest rates still climbing?
Dont believe I will be leasing it out, dont have any redraw in my investment but I did have an offset previously for a short period.
Given how high profile that instance was, and how they reversed their decision, it is less likely that this will happen again. (Though not impossible.)
However, there are other factors to consider that have been addressed below.
They didn’t actually ever technically even try to do it. Me bank (and earlier CommBank) actually stuffed up their redraw calculations for several years which more or less resulted in ‘bank error in your favor’ which Me bank corrected without communicating properly.
Essentially had they gone through with it no one would have been worse off than if they’d been using an offset all along, but because people were being shown inflated redraw balances the result was the obvious panic and reversal.
How it’s supposed to work is: if you have say a $100,000, 10 year loan, and on day 1 put $90,000 into redraw then ask to reduce your repayments, you’ll be allowed to reduce your repayments by 90%, but 9 years into the loan, your redraw will also have reduced 90%, so you couldn’t redraw the $90k with 1 year remaining on the loan. Their error was to not reduce that available redraw over time, until they finally noticed, and panicked.
If you had an offset, putting money in the offset doesn’t let you reduce your repayments, so you’d see the same loss in available funds Me were trying to claw back every month instead of after 5+ years of accidentally having too much available.
Since they’ve fixed their systems a repeat isn’t going to happen, instead of a redraw being accidentally better; it is, for a property you’ll definitely never rent out, functionally the same, but cheaper.
The redraw scenario people are panicking over has never happened or even been proposed to happen.
Always offset if the loan is for investment.
owner occupied, not offseting my investment loan so does not matter.
if you ever intend to make the property an investment property you still should use an offset.
I would go as far to say if they ever intend to make the property an investment property, they should definitely use an offset.
In most cases, a property purchased for an investment can get away with having a redraw facility as opposed to an offset as if one is trying to maximise their tax deductions, they would never put any extra money into their investment loans and put it all into their PPR loan.
If it's for ppor you need to compare all variables: interest rate, loan amount, how much you can offset, fees for offset, etc. If the rates are the same, it's ppor, and you don't mind the increased inflexibility of a redraw, then don't pay $120 for an offset. People scoff at offset fees but easily accept slightly higher interest rates, even if it leaves them in a worse final position. It's just maths.
Yeh its for ppor, current bank cannott offer me anything better so I have to jump ship and this lender is the only option currently. Just deciding if its worth $120 extra or continue using redraw with less peace of mind.
Offset all the way. Would never go for a re-draw. Any cash in the offset is used to calculate interest payable: so debt minus offset = sum to calc interest.
I pay $10pm for an offset. It's worth it.
Cheers
Its my understanding that redraw is also used to calculate interest payable.
kind of, but not exactly.
OFFSET
Money in your account offsets against the balance of your home loan, reducing the interest charged.
REDRAW
Funds in your redraw facility created by extra repayments reduce the interest amount on your home loan.
Offset is simply an account that is a sibling of the debt, and is used to calculate net debt for interest calc
Redraw is cash you have paid ahead of schedule and can ask for it back, sometimes it takes a bit of time to do so and some banks set limits, so you can only access say $10K pa of your redraw, even if you need $20k, too bad.
Offset or bust for me
I have never seen a redraw be restricted or not instant. Most banks treat them exactly the same as a savings account. I regularly put tens of thousands in and out of redraw and even pulled a few hundred thousand out instantly to buy another property. Maybe in the 90’s they were different but they’re functionally no different these days, both reduce interest 1:1 the same and a redraw will also let you reduce repayments as it does reduce the debt, it is absolutely not treated by most banks as repayments in advance.
An offset is a complete and utter waste of money UNLESS the property is or ever might be in the future an investment property. In which case it could save you tens of thousands or more in taxes.
I pay $10pm for an offset. It's worth it.
Bargainers will try to save $120 p.a. in the case of no difference to them.
There is a lot of nuance to be worked through here, but the big one to note is that a redraw is "in the loan", while an offset is not.
Both allow for money beyond the contractual loan repayment schedule to be paid in to reduce the principal and therefore the interest, and to allow access to that excess money at a later date.
The difference manifests itself in two fundamental ways.
Firstly, because with the redraw, the excess money is "in the loan", accessing it is considered from a tax perspective as a new loan for a new purpose. Where this manifests itself is if you have a PPOR with redraw that you intend to later use as an investment, the interest on any money redrawn is not deductable. This is because these redrawn monies are deemed to be used for a different purpose than the purchase of the property. Because monies in offset never actually go "into the loan" (they only offset the principal and therefore the interest) you don't have this same problem and can otherwise allow money to wash through the offset effectively as you see fit with no issues/complications in this regard.
The second point, that is almost always overlooked, is that money in an offset account is legally defined as being in a deposit account. The flipside to which is that these monies are not actually paying down the loan. While the risk maybe small, this means that in the event of the collapse of your bank, any money you have in the offset may be lost (subject to government guarantees, etc., etc.) as it has not actually paid down the loan. By contrast, the extra payments you might be making in a redraw situation are legally repayments of the loan. If that same bank were to collapse, the extra payments in this situation would not be "lost" as they have already been applied to the loan.
others has point out pro and cons but if you don't have a lot of money in offset it doesn't really matter much
probably come down to, do you have a habit of spending money sitting in your account? if that is the case safer just to pay extra into the loan and locked it away.
not a huge amount of funds I guess but planning to park all of my savings so still meaningful in someway.
Accounts that allow redraw these days aren’t any less accessible than a savings account. Some even have debit cards linked to them. Psychologically people might treat them differently though. And the ATO does.
Only $10 per month for an offset?
A credit union?
no, its a big 4.
Which one ?
ANZ
I must be lucky then, my offset account is fee free. I’m with CBA.
I've never had a fee free offset account… usually I need to pay an annual fee for that and any other things deemed a perk under my loan (like a further interest rate reduction).
Do you pay any annual fee for your home loan?
I've had both and make a withdrawal every quarter to pay tax. Unless you need to need to make multiple withdrawals a week, either should be fine.
Redraw on your equity and use to invest in shares or income producing assets and claim the interest as a tax dedcution.
Why not have both??
Crazy that you have to pay. I have 2 accounts that are offset against my mortgage. As long as I have money coming into them every month they are free.
Plus I can redraw off my mortgage if I really need the money.
Same here with CBA, redraw and offset for PPR. Reading through these comments has made me so confused, now I have no ide what I'm doing
nothing wrong with offset and redraw facility
almost all loan comes with redraw facility, offset is optional
I have offset account = my loan amount, then I paid my mortgage fortnightly, any excess money higher than loan amount in offset I made additional payment to the mortgage, so technically I just paid off principle only and never paid interest.
It is my understanding that they are two different mechanisms. One, the redraw, allows you to draw off additional repayments you may have made. Generally, you'd do this in times of hardship. The benefit is, you are paying your mortgage down faster. The downside is the money is on the mortgage and cannot be accessed 'at call'.
Offsets are a transaction account, linked to the mortgage where your payroll and other incomes enter, 'offsetting' the mortgage calculations in an attempt to minimize the interest payable. Ideally, this needs to be kept up for it to work best. Benefits are - it's at call. Downsides - if you cannot trust yourself to leave your money alone, its impact may be negligible.
Personally, I've never bothered with an offset and merely made additional mortgage payments, happy in the knowledge that if I need that money back, I can access it.