One of the common questions our clients often ask is “Should I use an offset account or redraw facility..?”

There isn’t a short answer, but rather it’s important to understand the implications of either one to ensure that your strategy aligns with your financial goals. Let’s start by looking at what redraw and offset accounts actually are.

Redraw Facilities

A redraw facility isn’t actually a separate account, but rather a feature of your loan. This allows you to take back (redraw) additional amounts that you’ve paid back of your loan above and beyond your minimum required payments. Some lenders will set minimum redraw amounts and some will impose other restrictions so it’s important to understand that they’re often less flexible than an offset account.

To put this simply, let’s assume that Rachel has a loan balance of $500,000, and minimum monthly repayments of $2,000, equating to $24,000 each year. Rachel decides this year to repay extra and pays off $30,000 of her loan. This means that she’s reduced her principle and interest amounts, and can redraw the $6,000 she paid in additional repayments ($30,000 - $24,000).

Offset Account 

By contrast, an offset account is a separate bank account, that you can transfer in funds in and out of and also have your employer salary paid into it. You can often use your offset account as an everyday transaction account to pay your bills and go shopping. Importantly, if you have funds sitting in your offset account, this will reduce the amount of principle of your loan that you pay interest on.

For example, going back to Rachel’s scenario, assuming she has a current loan balance of $500,000, and has $50,000 sitting in her offset account, this means that she will only pay interest on $450,000 ($500,000 - $50,000). Importantly, Rachel always has access to this $50,000 and can decide to withdraw it, spend in or go out and purchase another property with it.

Purpose of the Debt 

This is where the key differences lie, in the actual purpose of the debt, and why you need to pay close attention to how your financing strategy is aligned to your financial goals. Let’s consider the following scenario:

Rachel is currently looking to buy her first home for $500,000, and knows that she will only live in the property for 5 years, before seeking to upgrade to a larger house. She pays her 20% deposit and secures a loan for $400,000 and begins making her repayments. Rachel then inherits some additional funds, an amount of $200,000, and decides that she will pay this off her mortgage as she knows she has a redraw facility so she can always take this money back out. 

Rachel continues to make her repayments, and then 5 years later she moves into a larger home and decides to rent out her first property as an investment. She then redraws her $200,000 from her inheritance that she used to reduce the loan, and she has no changed the purpose of the loan. The $200,000 is no longer tax deductible because she is redrawing it to pay for her own home.  

Instead, Rachel could have sought great advice from an investment-savvy mortgage broker, and deposited this $200,000 into her offset account. Let’s consider what a difference this could make to Rachel’s potential tax deductions.

As you can see, the difference is $10,000 in additional tax deductions, which could represent thousands in savings to Rachel.

While Rachel is living in the property, it doesn’t necessarily matter whether the funds are held in the redraw account or her offset, however if this property becomes an investment property then that’s when it changes. The differences in tax saved can be substantial and make a significant difference when it comes to achieving your own financial goals.

Remember to speak with your accountant and savvy mortgage broker to structure your financing correctly from the outset and avoid costly mistakes like holding additional funds in the wrong account.

Ally Home Loans Pty Ltd is your ally in finance for all of your home loan, investment property, business and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.

Book an obligation-free, complimentary consultation here today.

Ally Home Loans Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.