OFFSET ACCOUNT VS REDRAW

What’s the difference between a redraw facility and offset account?

A question I’m constantly asked and one that appears on a lot of property investing forums is “what is the difference between a redraw facility and an offset account?”

The fundamental difference is that “redraw” is when you’ve paid extra money into your home loan and you’re able to “redraw” those funds back out of the loan. An “offset” account is a bank account linked to your home loan. You can place money into this account – and take it out.  The money that sits in the account saves you interest on your home loan.

Most variable loans come with the ability to redraw.  To be able to use a redraw facility, you need to make extra repayments in addition to your minimum loan repayments. Fixed loans aren’t usually as flexible as variable loans – and it’s often the case that you can’t redraw or make unlimited extra repayments into these loans.

An “offset” account is a bank account which is linked to your home loan. Instead of earning interest on the money sitting in your offset account (as you would a normal bank account) – you reduce the amount of interest you pay on your mortgage by having funds sitting in your offset.

Let’s look at an example

So for example – if you had a $200k mortgage with $10k sitting in your offset account – you would only pay interest on $190k (take the $200k mortgage and subtract the $10k sitting in your offset).

Offset accounts are generally only available for variable loans. However – there are a small number of lenders who allow a fixed loan to be linked up with an offset.

So all in all – “redraw” is a feature of a loan whilst an “offset” account is a bank account linked to your home loan.

What implications does using a redraw facility or offset account have with property investors?

The biggest issue is that some borrowers “redraw” funds from an investment loan – which can be a big no no! When redrawing funds – the tax man may consider those funds as “new borrowings” which means that they’d only be deductible if used for investing purposes.

Offset accounts don’t present the same issue – you can generally transfer money in and out of an offset without the same taxation implications.

As always – seek professional advice from a qualified tax accountant on your specific scenario.

Jamie

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The information herein is not intended as investment, financial, legal, taxation, building, development or any other advice and must not be relied upon as such. You should obtain independent professional advice and make further independent enquiries before making financial, legal, taxation, building, development or investment decisions.