Redraw vs offset, it is a well discussed topic. Most borrowers would know the features of both.
Redraw facility allows borrowers to:
- make extra repayments;
- withdraw the additional repayments at any time;
- save interest on loan because of the extra repayments made.
Offset account:
- is a separate account from the loan account;
- reduces interest as interest is calculated on the net balance of the loan account and the offset account;
- can be accessed like an everyday account.
From saving interest perspective, the two almost achieve the same result.
The big difference
The big difference is the tax implication when those extra funds are accessed for other purposes.
In simple words, when the funds are accessed for investment purposes, interest paid on the funds would be tax deductible. If the funds are used for non investment purposes, unfortunately the interest paid would not be tax deductible.
For example, additional repayments were made on an owner-occupied loan over the years. At one point, the owner decided to rent the property out, withdraw the cash and use it as a deposit to buy a new home. The owner cannot claim tax deduction on interest paid on cash that was withdrawn to purchase the new place. If the owner had an offset account instead and use the cash from the offset account to purchase the new home, interest on this component would be tax deductible.
As loan purpose could change during the life of the loan, it is always recommended to be flexible and keep the additional funds in an offset account. Although having an offset account could come with a small cost. Weigh up the cost and benefit before making the final decision.
We are Chartered Accountant qualified mortgage brokers, we are here to help if you need further guidance.
