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Offset Accounts vs Redraw

Discussion in 'Property Finance' started by AusMover, 31st Aug, 2015.

  1. AusMover

    AusMover Well-Known Member

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    Hi all, and kind attn: Terry, Jamie, Jess & Peter :)

    For my PPOR home loan, I am all set with Bank 1 for a loan ready for settlement and which has a linked offset account. Settlement date is far ahead and have not withdrawn any money yet.

    Now, from another Bank 2, I am getting a significantly better rate (0.3% lesser than Bank 1) and there is no annual fee. Very tempted to switch!

    The major drawback is that Bank 2 is only offering a Redraw account and doesn't have an offset account linked.... :(

    I would surely be making many re-payments from my savings into the Redraw account.... and then would need to re-draw money for health emergencies, air travel, child schooling and could be so many other non-deductible reasons in times of need ..... or it could be for investing into an IP ....

    I read the recent posts here in PC that mention tax complications that could arise when the PPOR is later turns into an IP (a likely scenario for my case as well) and the loan is already "mixed" due to multiple re-payments and re-draws for various purposes....

    I am a noob and difficult to understand what exactly the tax complications are.... but more interested to know what could be done and is there any way to still get around the issues with a Redraw account?

    Are there any workaround solutions, like I was reading something like a "split loan"?

    How do people that only have a re-draw account deal with the taxation in such scenarios?

    What should I do now? :confused:

    Stick to Bank 1 with the Offset Account or would it be OK and mangeable to move to Bank 2 (Redraw account) that is giving me 0.3% lesser rate which is very tempting? :(

    Is Redraw a complete No-No...??

    Need all your help and guidance please to make the decision....

    Thanks already... :)

    Best Regards
    AusMover
     
  2. sash

    sash Well-Known Member

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    Read your loan contract...but a redraw can be ..non pun intended ...withdrawn as it is part of the mortgage product.

    The Offset is deposit product and have far more governance....
     
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  3. pinkboy

    pinkboy Well-Known Member Premium Member

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    Option 3. Call bank 1 and ask for price match on bank 2.

    pinkboy
     
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  4. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    You might be able to have the best of both worlds - there are some great deals on PPOR that have a good rate and an offset.

    But if you were to choose just one of the two options you mentioned, I'd go the offset. The deductions you lose with a redraw could add up to many times the 0.3% difference.

    If you are never going to turn turn PPOR into an IP a redraw might be okay, but things can and do change.
     
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  5. AusMover

    AusMover Well-Known Member

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    Hi Sash.... Thanks...

    So you are saying the Bank could cancel the Redraw facility in the future.... leaving me standed :(... unless I switch to another bank then (but paying the LMI again) :eek:.....
     
  6. AusMover

    AusMover Well-Known Member

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    Thanks Pinkboy... Yes, would surely give that a try as well ....
     
  7. sash

    sash Well-Known Member

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    Depends on your loan contract...but definitely the case with LOCs.
     
  8. AusMover

    AusMover Well-Known Member

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    Many thanks Jess for the advice...... My current rate with Bank 1 is 4.3% and is quite competitive... I will drop you a message to share the details...

    I have a good 50% chance of renting my PPOR later, so it is a likely scenario that PPOR could become IP...

    Thanks
    AusMover
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    There is no tax work around. If you deposit into a loan this is a permanent payment of principal from a tax perspective. Any redraw will create a mixed loan and reduce deductibility against any income that property may produce in the future.

    Go offset. Look for a better rate.
     
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  10. AusMover

    AusMover Well-Known Member

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    Thanks a lot Terry.... Read your Tax Tip 19 as well .....
     
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  11. AusMover

    AusMover Well-Known Member

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    Sub: Split loans

    Hi Terry and everyone,

    Had a thought and wanted to run it past the experts here...

    For a $400k loan, if I could request the Bank to do 2 split loan accounts (one with offset, one with redraw)..... say,

    $300k Redraw loan account at lowest interest rates...
    $100k Offset loan account with slightly higher interest rates....

    I would initially try to put all my savings into the Offset Account and fill it up....(and this would easily take 4-5 years to fill up) ....

    Thereafter, any further savings in addition to $100k I can start parking in the Redraw account....

    Whenever I need to redraw some funds for emergencies or any personal non-deductible purpose, I would always be using the funds from the Offset Account (and I am assuming that I wouldn't ever need more than $100k), hence keeping the original loan as non-polluted and keeping the interests fully tax deductible...

    Do you think such a structure could work out, to give me a mid-way solution and benefits of both types of accounts? :rolleyes:

    Please give your views....:)

    Thanks
    AusMover
     
  12. tobe

    tobe Well-Known Member

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    I cant think of the lender where this would have a significant savings. Most lenders give you an offset in exchange for an annual fee. They also give you a discount which depending on your loan amount brings you back to somewhere close to where their basic variable (redraw) rate would be. There shouldn't be much differential. It wouldn't be economical to run 2 loans. It might be worth while fixing the larger portion, and after 3 years and 'filling up' the offset the fixed rate expires and you can start on the bigger portion?
    Perhaps share which lender you are considering?
     
  13. AusMover

    AusMover Well-Known Member

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    Hi Tobe... Thanks...

    HSBC is the lender with their 3.99% (with establishment fee) / 4.05% (with no fees) promotion going on but this is a basic redraw loan account ....

    I already have an Offset Account set up with CBA on 4.3% .... but annual package fee of $395 also applies... This CBA one is an expensive "premium" product... as I would be paying 0.3% more in interests per annum + the package fee...
     
  14. tobe

    tobe Well-Known Member

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    ok, so the two loans are with different lenders and different securities. Id suggest having the offset account attached to your non deductible, PPOR debt, and the investment debt with the basic redraw. If it were me, I wouldn't pay down the investment debt, instead purchasing another investment when cash flow allows.
     
  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Ausmover it could work. Only reason to do it would be the lower rate with no offet.
     
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  16. AusMover

    AusMover Well-Known Member

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    Thanks Terry!