August 31, 2017
Offset vs Re-Draw
What is an offset
An offset account is typically a separate transaction account that can be used for day to day banking. The funds held in this account are netted off against the home loan balance on a nightly basis. This results in you paying less interest on your home loan. Ie You hold a home loan of $300,000 and a offset account with a balance of $10,000. On that one day you would only pay interest on $290,000 given it was linked to a 100% offset account. As a negative you do not earn interest on the $10,000 held in the transaction account.
What is re-draw
Redraw is where you can access additional repayments made directly into your home loan. Ie Your minimum home loan instalment is $1500 per fortnight but you pay $2000 per fortnight. You will then have “re-draw” access to that $500 which is usually accessed via internet banking and moved into your day to day account as cleared funds.
Which works best?
Investment Home Loan
Offset accounts are the clear winner when it comes to investment home loans. The reason is that you have access to funds in your transaction account that can then be used for any purpose. If you put extra funds into an investment home and then re-draw them you really should only be using those funds for further investment purposes. If you redraw funds from an investment home loan and then take a holiday with those funds you may well lose any tax deduction on that portion.
As the little girl from the taco ad says “why we can’t have both”? She has a very valid point. When it comes to home loans I find the tactic of building up funds in a 100% offset account to the point where you can move a lump sum into the mortgage works well. In this scenario the benefits of the 100% offset account equal putting funds directly into the loan. However if you put funds into the home loan then it reduces the temptation to spend the funds and the extra step needed to take funds from the home loan are often just enough to make you think twice about dipping in the “funds in advance” sitting in the home loan
When it comes to investment home loans the 100% offset account works really well. By all means put extra payments onto your investment home loan but just be very careful and keep great records should you utilise the redraw.
For home loans the 100% offset account and redraw both work well but when it comes to larger amounts it may be better to put them directly into the mortgage just to avoid the temptation of using them.