PPOR Loan: Offset vs Redraw

C

Catalyst

We have a Westpac Rocket home loan for our PPOR (So cool that I now know some of the IP acronyms because of SS forum :D )

Right now we've parked most of our savings in the redraw portion of the home loan. Offset is used like a transactional day-to-day account. Salaries go there. Bills get paid from there.

As we are determined to start our IP journey, is it better to move the funds into offset?

Not sure how long it's going to take me to learn enough before pulling the trigger though :p
 
If it will never become an IP, then there's likely no problem with putting the money into the loan redraw facility. The biggest risk is that the bank can cancel the redraw on a whim which would remove your access to the extra repayments, but even this is unlikely.

The die hard investors will say always use an interest only loan with an offset account. This is the technically right strategy if the house might become an IP, but it doesn't suit everyone.

My own PPOR loan is P&I. I use an offset account for my day to day stuff, there's also a reasonable amount of money in the redraw facility. My PPOR would only become an IP long after I've retired, at which point I don't anticipate having any non-deductible debt at all.
 
Best to keep all cash in the offset until you start to invest.

Then if you have equity keep the cash as is and borrow under a new split. Use this as deposits and get loans secured on the new property for the rest.

If no equity then move money from the offset into the loan, pay it down, and then set up a new split (not redraw) for the investment.
 
As far as I can tell the only advantage a redraw has over a 100% offset is that it makes it much harder to draw the funds. Now people may argue this a negative but to me it's a big positive as it locks away those extra payments as opposed to the offset which makes it quite easy to overspend.

I guess the same applies to P+I on the PPOR. Even if you think it will never become an IP you just do not know which is why I guess those die hard investors do not advocate it. Trouble with this approach is you need to be a great saver and ensure you never touch that money sitting in the offset.

That's all well and good until you get married to a wife who likes new shoes!
 
i have gone the redraw route with a 55 day interest free CC.

My place will probably become an IP at some point, but there is no reason why i cant just remove my excess loan payments when i start seriously looking for IP's. and change products.

knowing my luck, the bank will remove redraw feature the day before i decide to withdraw funds.
 
Family Man said:
i have gone the redraw route with a 55 day interest free CC.

My place will probably become an IP at some point, but there is no reason why i cant just remove my excess loan payments when i start seriously looking for IP's. and change products.

knowing my luck, the bank will remove redraw feature the day before i decide to withdraw funds.
Click to expand...

I think you really need to speak to a broker about this (Jamie correct me if I'm wrong) but:

If you pay down the principal and redraw it your loan will still be at the principal paid amount. For example if your loan is 300k now and you pay it down to 100k and then redraw the 200k (let's forget about LVR for a second) your loan is not now 300k again. It is still 100k and hence when it becomes an IP your only able to claim the 100k in interest.

If I am correct the part I am unsure of is how the redrawn 200k is set-up? Is it perhaps a LOC?
 
albanga said:
I think you really need to speak to a broker about this (Jamie correct me if I'm wrong) but:

If you pay down the principal and redraw it your loan will still be at the principal paid amount. For example if your loan is 300k now and you pay it down to 100k and then redraw the 200k (let's forget about LVR for a second) your loan is not now 300k again. It is still 100k and hence when it becomes an IP your only able to claim the 100k in interest.

If I am correct the part I am unsure of is how the redrawn 200k is set-up? Is it perhaps a LOC?
Click to expand...

You need to speak to a tax agent or a tax lawyer about tax advice.

Your will be $300k. But $100k of this will be associated with the purchase of the property and $200k will be associated with the redraw and this will unlikely relate to the property, or at the very best it will be seriously mixed and the interest unclaimable.

It doesn't matter if the redraw is a redraw or a LOC it consequences will be the same. The way to avoid this is to never pay down the loan but to park cash in the 100% offset account.
 
Terry_w said:
You need to speak to a tax agent or a tax lawyer about tax advice.

Your will be $300k. But $100k of this will be associated with the purchase of the property and $200k will be associated with the redraw and this will unlikely relate to the property, or at the very best it will be seriously mixed and the interest unclaimable.

It doesn't matter if the redraw is a redraw or a LOC it consequences will be the same. The way to avoid this is to never pay down the loan but to park cash in the 100% offset account.
Click to expand...

hmm, so the loan is $250,000. lets say i pay of $150,000 over the next 5 years.

You're saying that if i redrew fir instance the entire $150,000 only the interest on the remaining $100,000 would be deductable if/wehn it became an IP?

re-read 5 times and makes a bit more sense.
so how easy it to change froma basic no fee/low rate loan to something minimal + offset (CBA)
 
Family Man said:
hmm, so the loan is $250,000. lets say i pay of $150,000 over the next 5 years.

You're saying that if i redrew fir instance the entire $150,000 only the interest on the remaining $100,000 would be deductable if/wehn it became an IP?

re-read 5 times and makes a bit more sense.
so how easy it to change froma basic no fee/low rate loan to something minimal + offset (CBA)
Click to expand...

Yes that is right

Easy to change, but all payments into the loan are gone and shouldn't be drawn out.
 
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