I've been reading a lot of threads tonight trying to get my head around which is better. Can anyone explain to me the positives and negatives of both? I'd really appreciate it.
Thanks,
Michael.
Thanks,
Michael.
Equity v Offset
- Thread starter MichaelPark
- Start date
One is not better than the other, they're complete different things. You're probably thinking of redraw vs offset, but these are also very different things.
Equity is how much of your home you own. It's the difference between the value of your property and the amount you owe. You can access equity in your property by increasing the loan limit. The surplus cash from this increase should be put into the loans redraw facility.
Redraw occurs when you make extra payments to a mortgage. Redraw is the function that allows you to take those extra repayments back. It can also be used as a facility to store equity that has been converted to cash by increasing the loan limit.
An offset account is a savings account where you can put your savings or other cash. Rather than paying you interest like many savings accounts, it changes how the interest on your mortgage is calculated. The interest is calculated by assuming the amount owed is the amount owed minus the amount in the offset.
It's important to note that money in the offset account doesn't actually change how much you owe (and thus does not effect your equity position), it just changes how the interest is calculated.
* Keep money you have earned (such as salary or rental income) in an offset account.
* Money from equity access procedures should be kept in redraw.
The ATO can potentially treat tax deductions on property quite differently under certain circumstances so it can be very important to keep these two manners of storing money separately.
If you describe how you are thinking of making use of these facilities it's likely very easy to give more specific information on how it can be used relevant to your needs.
Equity is how much of your home you own. It's the difference between the value of your property and the amount you owe. You can access equity in your property by increasing the loan limit. The surplus cash from this increase should be put into the loans redraw facility.
Redraw occurs when you make extra payments to a mortgage. Redraw is the function that allows you to take those extra repayments back. It can also be used as a facility to store equity that has been converted to cash by increasing the loan limit.
An offset account is a savings account where you can put your savings or other cash. Rather than paying you interest like many savings accounts, it changes how the interest on your mortgage is calculated. The interest is calculated by assuming the amount owed is the amount owed minus the amount in the offset.
It's important to note that money in the offset account doesn't actually change how much you owe (and thus does not effect your equity position), it just changes how the interest is calculated.
* Keep money you have earned (such as salary or rental income) in an offset account.
* Money from equity access procedures should be kept in redraw.
The ATO can potentially treat tax deductions on property quite differently under certain circumstances so it can be very important to keep these two manners of storing money separately.
If you describe how you are thinking of making use of these facilities it's likely very easy to give more specific information on how it can be used relevant to your needs.
So would it be 'advised' to basically transfer 100% of your pay into the offset and pay bills etc from that account?
Do they both work the same, except offset is more easily accessible?
EDIT (in reply to your edit):
Basically just wondering how to store any extra funds we may obtain. We are very new to all of this (my fiancee's first house, my 2nd - other is an IP now). We want to buy another one in the future (ASAP of course
) and just want the most efficient, cost effective way to do so.
Offset accounts are a great vehicle for storing funds and at the same time preserving the original loan amount (in case you convert your PPOR to an IP amongst other reasons) as well as decreasing the interest that is charged on the home loan it is linked to.
Instead of paying back the bank you can make interest only payments and keep the difference in an offset account and then you decide what happens to this money.
This approach works if you have disciplined money habits so not for everyone but would suit many with an investors mindset which would be many here with many to follow
Instead of paying back the bank you can make interest only payments and keep the difference in an offset account and then you decide what happens to this money.
This approach works if you have disciplined money habits so not for everyone but would suit many with an investors mindset which would be many here with many to follow
Keep reading and pondering and the penny will eventually drop Michael.
Yes, that would be my advice.
Yes because every single P&I repayment will reduce your cash available for the next purchase.
So would it be 'advised' to basically transfer 100% of your pay into the offset and pay bills etc from that account?
Do they both work the same, except offset is more easily accessible?
EDIT (in reply to your edit):
Basically just wondering how to store any extra funds we may obtain. We are very new to all of this (my fiancee's first house, my 2nd - other is an IP now). We want to buy another one in the future (ASAP of course
The offset account is a normal day to day transaction account or savings account except it effects how the interest is calculated on your mortgage instead of paying you a small amount of interest every month. It's more cost effective than having a regular savings account because it will save you more interest on the mortgage than you would earn in a high interest savings account.
Before you had a loan you used a transaction account for your salary and bills. You now use an offset account instead simply because it's more cost effective, but otherwise treat it as your regular transaction account, or as a long term savings account.
Some banks allow multiple offset accounts and you can use one for your day to day banking (salary & bills) and another for your longer term savings.
If you read my description above of equity, you'll realise it's not an account, it's a concept. You can't transact from it.
Generally you can't transact from the redraw facility on your loan. Even if you can, you shouldn't.
This is a completely different question to the original topic, but if there's any chance that the PPOR may become and IP in the future, it's a good idea to have the loan as interest only. If it will never become an IP (ie you'll live there forever or sell it when you move), then make it P&I.
Apples and oranges - completely different.
Equity is the value of a property less any loans.
Offset accounts are savings accounts where you keep cash.
