Mortgage Offset or Mortgage Redraw?

[capitalist]

I read a recent post that warned not to get confused with a mortgage offset account and a mortgage redraw as they look the same, but not to the ATO.

Can anyone suggest what is the best thing (tax effective) to do with my $ while i am looking for a PPOR to purchase?

I recently sold a unit at auction, but it's a 90 day settlement which takes me to the end of June before I can access the $.
If i find my PPOR before settlement, i'll most likely organise my settlement to coincide with the settlement of the property i sold.

But if i don't, what is the the best thing to do with my $ while i look around for my PPOR:
1) Put it in a high yield online account such as ING (4.75%),
2) Put it in a mortgage offset, or
3) Put it in a mortage redraw?

Can anyone distinguish between 2) and 3) re interest saved and tax benefits.
I always thought 2) was a like a savings account linked to the mortgage where no interest is paid, but is instead taken off the interest on the mortgage.
And i always thought 3) was just putting your $ into the mortgage with the ability to draw on it if required (but for a fee).
Is tax payable on any of these?

Any advice is much appreciated.
Thanks,
Mark

 

[DaleGG]

Hi Mark

There is a big difference from a tax perspective!!

With a redraw facility, you are deemed to have repaid the original loan and when you redraw those funds for private purposes, the tax office consider that you are taking out a new loan which will not be tax deductible because the funds are being used for private purposes.

However, if the money was dropped into an offset account the loan is not being repaid. This distinction is very important. When the funds are withdrawn from the offset account the original loan has not changed and so the interest remains tax deductible regardless of what you do with the redrawn funds.

In my thoughts, answering your question about what is best is frought with danger because we cannot know things like: your tax bracket, the amounts involved, the loan details and terms etc etc.

However, having said that, given no unusual circumstances, I would place the funds into an offset account.
I hope that this helps

Dale

Originally posted by capitalist
I read a recent post that warned not to get confused with a mortgage offset account and a mortgage redraw as they look the same, but not to the ATO.

Can anyone suggest what is the best thing (tax effective) to do with my $ while i am looking for a PPOR to purchase?

I recently sold a unit at auction, but it's a 90 day settlement which takes me to the end of June before I can access the $.
If i find my PPOR before settlement, i'll most likely organise my settlement to coincide with the settlement of the property i sold.

But if i don't, what is the the best thing to do with my $ while i look around for my PPOR:
1) Put it in a high yield online account such as ING (4.75%),
2) Put it in a mortgage offset, or
3) Put it in a mortage redraw?

Can anyone distinguish between 2) and 3) re interest saved and tax benefits.
I always thought 2) was a like a savings account linked to the mortgage where no interest is paid, but is instead taken off the interest on the mortgage.
And i always thought 3) was just putting your $ into the mortgage with the ability to draw on it if required (but for a fee).
Is tax payable on any of these?

Any advice is much appreciated.
Thanks,
Mark

 

[Rolf Latham]

Hiya

I would agree with Dale

Offset wins hands down simply because the ATO implies so.

Ta

rolf

 

[capitalist]

Thanks for the advice...

Thanks for the advice Dale and Rolf, it is appreciated.
My bank (CBA) has told me to put the $ in redraw, but i think i'll now be opening an offset account instead for the reasons you mentioned, plus i'll be hit up for redraw fees too.

However i guess it really doesn't make much difference in my case if i am intending to buy a PPOR which is non-deductible debt anyway?

 

[Lily House]

Hi Capitalist,

Just referring to your final sentence - please be very careful. It does make a big difference. Yes the money is for your PPOR but that would imply that the loan you are looking at offsetting/redrawing with is for an IP. This is what is important, not what the money will be eventually used for.
So if you put the money in against your IP loan and then REDRAW it later, the total loan will no longer be tax deductable.

Eg. your IP loan is for $100 K and you put in $70K from the sale of your unit, just until you find your PPOR. If you then REDRAW that $70k when you find your PPOR, your IP still has a loan of $100k but now only 30% of the interest on that loan is tax deductable. However if the $70K is put in an OFFSET account, it can then be taken out later for your PPOR and interest on the whole $100k is still claimable.

Even if the loan is on a current PPOR still be careful. If you are planning on buying a new PPOR then perhaps the old one will become an IP? Still worth having the maximum loan on the old PPOR for obvious reasons. The only situation I can see where a redraw would not make much (if any) difference over offset would be if your loan is for a PPOR which is going to be sold as well as the unit.

Hope all this makes sense.

Good luck.

Lily