Offset or Redraw?

[ralph wiggum]

Just a quick question - Is there any diffence in having your money in an offset account to decrease your interest, or paying extra off the loan and redrawing when you need it?
ie tax diffences, effect on credit rating etc etc
Any advice would be appreciated. I am currently doing the latter. There are no fees, but I feel I might be putting myself at a disadvantage in other ways.
Cheers

 

[Simon]

The point I usually raise is that if you should upgrade the PPOR and make the existing home into an IP then using an offset means you have preserved a larger debt against the IP and a smaller loan against the new PPOR.

Depends on the amount in offset as to whether it is a huge difference or not.

Cheers,

 

[ralph wiggum]

It's for my IPs. There is no PPOR. Sorry, I should have put that in my initial post.

 

[WillG]

The offset account will offer you more flexibility because it is seperate from the loan. You have the option to use the $$'s for personal use without effecting your loan deductability.

 

[D.T.]

Hi RW,

IMHO, offset is a better option in terms of tax. You can take the money out and spend it on whatever you like and the underlying loan will still be fully deductible. Whereas, with a redraw facility, when you redraw some of your funds out the ATO classifies it as a new loan for tax purposes. So if you draw it out and use it for investing thats fine, otherwise it can get messy...

But of course, theres only certain ppl who can (strangely enough) provide advice on offsets and I'm not one of them, so have a chat to your accountant or broker or something.

 

[Bear924]

Around two years ago I asked myself the same question, difference being that my loan was for my PPOR. I decided to stay with a redraw setup as the interest rate (with my loan anyway) was higher with the offset and I couldn't see enough advantages with the offset to cancel the higher interest repayment. To get around some of the problems mentioned by others I did the following:
Split my PPOR loan into two accounts.
Use one of the accounts to house my non deductible PPOR debt(and any other consumer debt I may require)
The other account I use purely for investments. This makes it nice and simple come the end of the financial year.

As my PPOR debt decreases(PPOR value increases etc) I increase the amount of debt in the investment loan. Both accounts are 'backed' by the value of the PPOR.

Did have some hassles creating two seperate accounts and moving the different amounts of money around initially however now it's working it's easy to live with.

 

[knightm]

Hi RW,

IMHO, offset is a better option in terms of tax. You can take the money out and spend it on whatever you like and the underlying loan will still be fully deductible. Whereas, with a redraw facility, when you redraw some of your funds out the ATO classifies it as a new loan for tax purposes. So if you draw it out and use it for investing thats fine, otherwise it can get messy...

But of course, theres only certain ppl who can (strangely enough) provide advice on offsets and I'm not one of them, so have a chat to your accountant or broker or something.

has anyone heard of this use of offset account being challenged by the ATO? I am in the same boat myself, and would like to have an offset account down the track for this purpose - but am wondering how the ato see the changing level of TD debt (as you spend on personal items etc) for non TD expenses?

 

[Rolf Latham]

Hi Knight


The issue with LOC/redraw vs offset is that you are changingthe nature of the debt.

All you are doingwith an offset is reducing your interest payable and thereby reducing your tax deductions. At all times your money stays your money, and as long as you only soend your money there wont be an issue

ta

rolf

 

[knightm]

thanks rolf - makes the offset quite a bit more attractive then

 

[Rolf Schaefer]

Offset vs Redraw/LOC

Hi,
you may want to have a look at this thread and the attached diagram.

http://www.somersoft.com/forums/showthread.php?t=14604

Have a great day.

 

[knightm]

just read that one - also very helpful

thanks to r1 and r2 (you two should launch an investing tv show for the kiddies!)

 

[Peter_Tersteeg]

Put simply, an offset account keeps your money separate from the loan and separate from borrowed money.

Makes it much simpler for tax purposes.