Offset Account
An offset account is typically a transaction account that is linked to your home or investment property loan. As the name suggests the offset account ‘offsets’ the loan balance, such that interest is only payable on the balance of the loan.
For example, you have a home loan of $500,000 and you save up $50,000 in your offset account. The interest will only be charged on $450,000 which is the balance of the loan.
Let’s say you are paying 4% interest on your loan, your interest charged will be 4% of $450,000 per annum i.e. $18,000 per year ($1,500 per month) as opposed to 4% of $500,000 per annum i.e. $20,000 per year ($1,667 per month approximately).
Such that you will be paying $167 less interest per month.
Since Principal & Interest repayments are a set figure per month, parking money in the offset means whilst your repayment amount is the same per month, the offset money means, you will be paying more of your house off every month. Such that use of an offset account has a ‘reverse compounding’ effect on your loan balance.
How you should use an offset account – have your work salary, dividend or rental income go into the offset account. This way you maximise the savings made on your interest paid every month.
Offset accounts are great because…
- You keep control of your money
- You can use the funds for any other non-deductible expenses
- Depending on how flexible your lender is, you can see if you are able to convert your savings into “tax deductible debt” without a full loan application
- ‘Reverse compounding effect’ to pay off your loan sooner as the interest is charged on the balance thereby reducing greater principal every subsequent month
- If your property is an investment property and in an event you are paying interest only, using an offset account means you aren’t paying off the loan and maintaining the tax deducitibility of your full loan
Redraw Account
A redraw account allows you to pay off the balance of your loan, and the interest charged. You can access the funds and ‘redraw’ these funds out of the account.
Be wary however that some lenders may restrict how much redraw funds you can take out at any given time.
Further, using the redraw account is basically, paying off your loan progressively. This isn’t ideal if this property is your home and you want to make it an investment property as you have contaminated the tax deductibility of the loan. This means your investment property will cost you more than it should.
Redraw account can come in handy however if you have savings available in an offset of your home and you want to put the money in the account and pull it out thereby reducing your ‘home debt’ on paper and ‘borrowing’ back the funds for investment purposes.
We recommend our clients to use offset accounts over redraw accounts. Having said that, having the ability to add a redraw account to use on demand when you are ready to invest in property is great.
Often people focus on low cost products with low rates. However these products do not offer offset accounts. This means home loans in fact end up costing home owners MORE than saving on a few hundred bucks in fees per annum! Always do a cost benefit analysis of what you are saving right now and ending up costing yourself in the long term. Work with your broker to determine the direction you need to be taking with a big picture focus!
Always seek relevant tax advice from your accountant and credit advice from your broker to suit your own needs, goals and circumstances.
About Us
We have 8 years + experience in buying multiple properties starting with our home and then building a real estate portfolio.
Mona is a Chartered Accountant, and used to work for a Big 4 Accounting Firm in personal income taxes, so any advice you receive is tailored to your needs. Sana is a former IT Project Manager and we both used to work for Macquarie Group before starting our own home loan business to assist others with their home purchase and wealth building through property.
We have clients all over Australia from Sydney, Melbourne, Brisbane, Perth, Gold Coast, Sunshine Coast, Newcastle
We hand hold our clients, and always happy to share our experiences and knowledge – this advice is available to mortgage broking clients.
Call us on 1300 97 60 60 or email on [email protected]
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