I dont understand an offset account ?

Excuse my lack of knowledge but I dont quite understand a Offset account .

Please let me give you this scenario

My IP rents for $350 week
I have $70,000 owing on it and its in a redraw account with $175,000 i can take out.

According to the Bank they are not charging me any interest on the 175k only on the withdrawel if I make one, and interest of course on the 70k currently 4.89%

I asked about a offset account but the Bank person said I wouldnt need one as im only paying interest on the 70k

I dont quite understand an offset account,would it be better in my case to have one?

 

How does one have redraw on an investment loan?

You probably paid it down by depositing an extra $175,000 over the years.

Now say you want to access that $175,000 redrawing it out will mean it is new borrowings so the interest will only be deductible if the $175,000 is used for investment purposes or business.

Say you needed an operation. an organ transplant which costs $175k (buying a kidney in China maybe). Once you withdraw the money you will have a mixed loan and the interest on this won't be deductible.

Now say you had not paid the loan down but have an IO loan with $175k in the offset account. You would have been paying the same in interest.

But when you go and buy your organ transplant taking the money out of the loan extra interest would be incurred, but because the loan is investment related and it hasn't been paid down the interest on this will be deductible.

At 5% pa that would have been an extra $8,750 per year in tax deductions for the next 30 years.

 

@Terrychris if you have money sitting in a savings account somewhere you can set up an offset account against that investment loan and put the money there. If you have 70k in savings you will be paying $0 interest on your remaining 70k loan.

 

As explained above yes, an offset account is preferable to a redraw.

Both offset and redraw are facilities to reduce interest charged with your money.

In your case you have $70k owing and $175k available via redraw. You pay interest on $70k

If you had used an offset account you would have a loan of $245k and another account with $175k cash - you pay interest on the loan amount minus cash in the offset ( e.g. 245k-175k = 70k).

Both scenarios reduce interest payments by the same amount, an offset avoids the complication of mixed purpose loans however.

 

A redraw is better if you intend to pay off the loan and/or only use funds on the IP (s). It saves more money too, I believe.
The offset is better when you want to buy another IP and are saving a deposit or you want to use some funds for jetsetting.

 

This person should be fired. If you are being charged interest on 70k, but had for eg 70k to put in an offset, then you'd be charged $0 interest.