‘Redraw vs offset’ is a common question we get so let’s break it down.
Redraw is a facility which allows you to take out any extra repayments you’ve put into your home loan. The extra repayments work towards reducing the interest by reducing your home loan balance. You’ll have to activate the redraw feature on your home loan by submitting your lender’s ‘Redraw Authority Form’.
While an offset account allows you to use your everyday funds to reduce the balance of your home loan; so, you’re only paying interest on the balance. This is money that’s easily accessible. However, even though you’re paying interest on only the balance, your home loan balance doesn’t change. This is more like your day to day bank account working for you.
There are two key differences:
- First, lenders have limits on the amount you can withdraw using a redraw facility, while, with an offset account, you have full control over your funds with no limits. And with some fixed-rate loans redraw facility is not available.
- There are tax benefits to using an offset for an investment loan instead of a redraw. For example, if you have a mortgage of $600,000 and have put in extra repayments and reduced your loan balance to $100,000. You then decide to buy an investment property and rent out your old house. You redraw $200,000 to buy the investment property. Your new loan would be $300,000 but the deductible investment loan interest, in this case, would be limited to the interest on the previous $100,000 balance. However, if you’ve put in the same amount into the offset. You’re paying less in interest as you’re only paying interest on the balance. However, if you withdraw the same $200,000 but in this case, the deductible loan interest will be based on the net debt of $300,000.
Offset gives you a better tax outcome taking into account your future investment plans. Although, many lenders charge a small fee for offset facilities. Finally, an offset account may only be suitable for financially savvy people. If you’re bad with money, redraw may be better suited.
Our award-winning specialist mortgage brokers can help you find the right option for your needs after a full assessment.
Give us a call on 1300 889 743 or fill in our free assessment form to find out.