Offset vs Redraw?
- Thread starter z611143
- Start date
Pretty much always offset.
In a redraw, if you withdraw money it counts as a new loan in the ATOs eyes. Therefore whether that loan is deductible or not depends on what those withdrawn funds were used for. If there's a mix of purposes thats going to get really hard to calculate.
Offset has the same net effects on your repayments, ie are reduced relative to how much you stick in there. Main benefit is that its your own cash, so you can do whatever the hell you like with it.
In a redraw, if you withdraw money it counts as a new loan in the ATOs eyes. Therefore whether that loan is deductible or not depends on what those withdrawn funds were used for. If there's a mix of purposes thats going to get really hard to calculate.
Offset has the same net effects on your repayments, ie are reduced relative to how much you stick in there. Main benefit is that its your own cash, so you can do whatever the hell you like with it.
Dave has done a good job answering.
Offset - it's a bank account linked to your home loan. Having money in the offset reduces the interest on your home loan. For instance, if you have a $10 loan and $1 in the offset - you only pay interest on $9.
Redraw - is when you have a $10 loan, pay $1 into it - and you have $9 left over. You then decide to "redraw" that $1 and your loan goes back up to $10.
The implication with redraw is that when you take that $1 back out (redraw it) it is classed as new borrowings. So if you used that $1 to buy something non investment related - it won't be tax deductible.
With the offset - you can generally transfer money in and out without the same issue as the above redraw scenario because it's transacting from a bank account.
Cheers
Jamie
Offset - it's a bank account linked to your home loan. Having money in the offset reduces the interest on your home loan. For instance, if you have a $10 loan and $1 in the offset - you only pay interest on $9.
Redraw - is when you have a $10 loan, pay $1 into it - and you have $9 left over. You then decide to "redraw" that $1 and your loan goes back up to $10.
The implication with redraw is that when you take that $1 back out (redraw it) it is classed as new borrowings. So if you used that $1 to buy something non investment related - it won't be tax deductible.
With the offset - you can generally transfer money in and out without the same issue as the above redraw scenario because it's transacting from a bank account.
Cheers
Jamie
Thats an awesome explanation. Thanks jamie.
So with offset can you get the same rate as redraw?
The effect of offset is exactly the same as putting it directly in your loan, both reduce interest by exactly the same amount.(assuming your offset is 100% - and most are)
Same interest rate on loans with offset accounts? For the most part yes, though there are some lenders offering bargain basement offerings without offset accounts.
Some simple rules that work almost every time.
Money borrowed = redraw
Money earned = offset (includes income, rent, dividends, etc)
If the offset account works properly, it should have the same interest saving effect as redraw.
Money borrowed = redraw
Money earned = offset (includes income, rent, dividends, etc)
If the offset account works properly, it should have the same interest saving effect as redraw.
The only benefit I see with redraw over offset is that it is not as easy to withdraw funds. As your offset is a standard savings account with an ATM card it's easier to overspend. Your salary will also usually go directly into your offset and if you don't disburse your funds correctly for your budget, again you may find yourself over spending.
Everything else though, offset is superior.
Everything else though, offset is superior.
OP:
http://www.yourmortgage.com.au/article/offset-vs-redraw-79457.aspx
http://finance.ninemsn.com.au/pfmanagingmoney/banking/8126268/banking-go-easy-on-the-redraw
Like everyone has said... offset!
redraw... maybe only if you're not disciplined about money and worry you'll use whatever funds/cash you have avail?
http://www.yourmortgage.com.au/article/offset-vs-redraw-79457.aspx
http://finance.ninemsn.com.au/pfmanagingmoney/banking/8126268/banking-go-easy-on-the-redraw
Like everyone has said... offset!
redraw... maybe only if you're not disciplined about money and worry you'll use whatever funds/cash you have avail?
Whilst this is practical advise from a savings discipline perspective, it tends to ignore the tax and investment planning aspect of the useful elements of both offset accounts and redraw. Simply putting your money into redraw as a savings measure frequently has dire consequences for people who plan to invest.
If you save money more effectively when you don't have ATM access to the account, simply use a different account for your day to day budget, transfer your savings to an offset account and don't link a card to the offset account.
The ninemsn is a good explanation of the benefits of an offset account. The yourmortgage article is not.
No worries.
You may find cheaper variable rates with no frills products that don't come with an offset.
Cheers
Jamie
Great simple rule on how to think about it Peter.
Adding some colour: If you're borrowing more to purchase an additional IP it doesnt make much sense to the funds into an offset and have the interest repayments come out of the offset account. This reduces the funds available you have in your offset (slowly), and thereby reducing the 'deductible' funds available for your next deposit.
Instead, it may be best to have borrowed funds put back into the loan and 'redrawn' when required for investment purposes.
Cheers,
Redom
The difficulty being with some lenders who cancel loan accounts as soon as they have a 0 balance, e la CBA.
All part of the process however in forming a finance strategy.
Offset for investing.
Redraw can be better if for your home in some ways as it is not as easy to spend the money or have it stolen as you wont be doing just random redraws (many times there are charges and limits)
You have to get your head around this & why you would choose one or the other
Look at all costs as well.
Your situation and actual position and circumstance will decide if one is better than the other for you. There are many things that can sway one way or the other.
Redraw can be better if for your home in some ways as it is not as easy to spend the money or have it stolen as you wont be doing just random redraws (many times there are charges and limits)
You have to get your head around this & why you would choose one or the other
Look at all costs as well.
Your situation and actual position and circumstance will decide if one is better than the other for you. There are many things that can sway one way or the other.
This question is not the right one to be asking. Redraw and offset are totally different things like apples and oranges.
When you take money from a redraw you are actually borrowing money again. Each redraw is a new loan for tax purposes.
An offset is a savings account and the money in it cash. There are no direct tax consequences to taking money out - other than the interest on the loan will go up.
Redraw should generally not be used because you should not pay down a loan. But I can think of 2 reasons why you may use redraw:
1. You are paying down your PPOR and decide to buy an investment but need money quickly. You can borrow from the redraw available and split the loan later (asap)
2. You borrow some money for a future investment and wish to avoid a LOC by using an IO loan with redraw. At settlement you pay all or most of the money back into the loan so the balance is nil or $10 and you later use the redraw to invest.
I can think of 1 reason to use an offset account
1. You have spare cash sitting around - so you may as well save interest by putting it in an offset. This should be against any non deductible debt. If you have none then it can be an offset linked to an investment loan.
Thanks Terry,
How does this work on a refinance? Just say an IP went up in value and I could pull $100k out of it, do I put this money in my offset then pull it out again to pay down a non tax deductible debt like a PPOR. Can I then claim the interest of the $100k as it's secured to an IP?
Sorry if this is confusing, my brain hurt trying to type that.
Cheers.
Tax deductibility isn't determined by the security it's attached to, but the loan purpose.
As such that 100k would NOT be tax deductible if it was used to pay down PPOR debt.
