Difference between a redraw and an offset account

Discussion in 'Loans & Mortgage Brokers' started by Savy mum, 26th Apr, 2017.

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  1. Savy mum

    Savy mum Well-Known Member

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    Hi
    To me, these accounts are the same. Can someone please explain the difference between an offset and a redraw.
    I currently have a redraw. I put all the money in the mortgage, live off the credit card, then at the end of the month, pay the bill. Same with an offset???
     
    Savy mum, 26th Apr, 2017
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  2. The Y-man

    The Y-man Moderator Staff Member

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    Same effect, different tax implication.

    IF you ever buy investments with your redraw, you have what is called a "contaminated loan" and short of paying a poor accountant a lot of money, you may never be able to claim a tax deduxiton on the interest (eg if you use the redraw for a deposit on an IP)

    I try to explain to people that an offset is a totally separate account (think of it like an ING direct account) earning the same interest rate as your loan.

    So if you homeloan is at 4.8%, the "savings account" get 4.8% too.

    In effect, you "offset" the interest cost.

    Now because this "savings" account is totally separate to your loan, the tax office don't give rats about how you use it - whether to pay for your groceries or whatever. But they DO care very deeply about how you use your redraw money if you want to claim interest on it.

    The Y-man
     
    The Y-man, 26th Apr, 2017
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  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Deposit into a loan is a repayment. Withdrawal is borrowing. This has far reaching tax and estate planning consequences.

    Payment into a offset account is just increasing savings
     
    Terry_w, 26th Apr, 2017
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  4. Savy mum

    Savy mum Well-Known Member

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    Thankyou Y man and Terry. Its a lot clearer now
     
    Savy mum, 26th Apr, 2017
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  5. Phar Lap

    Phar Lap Well-Known Member

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    …whilst reducing interest on connected loan.

    Its going to be well used now rates are heading up. ;)
     
    Phar Lap, 26th Apr, 2017
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  6. Colin Rice

    Colin Rice Mortgage Broker Business Member

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    Bank staff will say it the same thing. The ATO thinks differently as outlined above ;)
     
    Colin Rice, 26th Apr, 2017
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  7. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    I wrote a blog post on this exact topic :)

    Hopefully it helps.

    Cheers

    Jamie
     
    Jamie Moore, 26th Apr, 2017
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  8. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    As important fir some

    Your money becomes the lenders money

    Ta

    Rolf
     
    Rolf Latham, 26th Apr, 2017
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  9. Colin Rice

    Colin Rice Mortgage Broker Business Member

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    Even funds in an offset?
     
    Colin Rice, 26th Apr, 2017
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  10. Zoolander

    Zoolander Well-Known Member

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    I like offsets. It's like showing the bank hey look I have money- no you can't touch it but you can see it exists- so I should have less repayments (Interest only). Until you use that money to spend on lollies and the bank becomes angry and increases repayments to normal amounts.
     
    Zoolander, 26th Apr, 2017
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  11. tobe

    tobe Well-Known Member

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    Redraw, offset is 'yours'.
     
    tobe, 26th Apr, 2017
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  12. Colin Rice

    Colin Rice Mortgage Broker Business Member

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    I agree but have heard otherwise. @Rolf Latham ?
     
    Colin Rice, 26th Apr, 2017
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  13. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Bank offset or deposit taking institution offset is as safe as you can get versus

    " redraw offset" from a non bank.

    Yes people will argue it's the same ..... Read the redraw conditions.

    Ta
    Rolf
     
    Rolf Latham, 26th Apr, 2017
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  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Safest would be in a savings account t at another bank other than where the loan is. Because the all monies clauses gives the lender the right to use your cash to pay down any debts you have.
     
    Terry_w, 26th Apr, 2017
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  15. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    I like to think of it this way:

    Money you've borrowed is for redraw in the loan.

    Money you've saved is for the offset account (which is really just a savings account with a special feature).

    Best not to mix the two together if you can help it. You may not be able to un-mix them later if you need to.
     
    Peter_Tersteeg, 26th Apr, 2017
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  16. trinity168

    trinity168 Well-Known Member

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    Is an LOC the same as redraw?

    Thanks.
     
    trinity168, 7th May, 2017
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  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    No. But you can redraw from a loc.

    A loc is like a large credit facility.
     
    Terry_w, 7th May, 2017
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  18. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    pros.......... with quite a few lenders, a LOC is "evergreen", its IO or 1o 15 to 30 years,some LOCS allow capitalisation of interest



    cons........... Same potential tax issues as redraw loans, but even a bigger issue, because many LOCs have standard bank account transaction capabilities- cheque book, ATM, etc, some LOCs allow capitalisation of interest ( and no my repeat isnt a mistake)

    Your Money becomes the banks money - same as redraw

    Most LOCs have a "repayable on demand clause" - NOT the same as redraw

    Choose wisely for your circumstances - all these products have their place.

    ta
    rolf
     
    Rolf Latham, 7th May, 2017
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  19. trinity168

    trinity168 Well-Known Member

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    What do you mean by that statement? Sorry ... newbie here. Thanks.
     
    trinity168, 8th May, 2017
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  20. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    No need to pay the interest when it is incurred and added to the loan each month. You could just let the balance increase - but consider the tax effects
     
    Terry_w, 8th May, 2017
    #20
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