Redraw/Offset Interest confirmation from the bank?

Discussion in 'Accounting & Tax' started by TMNT, 24th Feb, 2020.

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  1. TMNT

    TMNT Well-Known Member

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    TLDR,
    I was just confirming a few things with one of my banks, and got told the $$$ parked in my offset will reduce my interest, but redraw wont due to new changes 12 months ago,

    I have $$$ parked in both as my offset limit is low,
    so I went into a bit of a panic as its totally opposite to my understanding and everyone elses, and started pulling out documentation, only to get a call back 5 mins later saying there was a misunderstanding, and that my offset $$$ will reduce interest

    is there a way to confirm this as my statements are confusing?
     
    Last edited: 24th Feb, 2020
  2. Trainee

    Trainee Well-Known Member

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    What is an offset limit and why does putting money in redraw change this?
     
  3. TMNT

    TMNT Well-Known Member

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    maximum you can have in the offset, like a ceiling
     
  4. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    PI loan >?


    ta
    rolf
     
  5. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    A offset facility will always comprise TWO accounts.
    1. A loan that is a DEBIT BALANCE
    2. A offset account which may look just like a savings account tied to the loan which has a seperate CREDIT BALANCE
    The word offset will be used. Most banks will only allow one offset to be linked to a single loan.
    The lender statements will often be printed together as they are linked.
    You are charged interest on the differrence between the two balances each day.
    The key benefit is that the loan principal is not affceted by money mixed with it. It is held to the side. ie One offsets the other.

    A redraw is a loan account that allow you to repay more than the minimum. Any extra you repay is held as a credit you can "redraw" so that the loan goes back up. BUT it will often be a blended loan as the original borrowing and the redraw will be different purposes. Redraw is best avoided v a offset.

    If you have a loan with redraw and also a offset it is best to NEVER use the redraw functionality by making extra repayments. Add those to the offset instead. Make the MINIMUM loan repayment only to the loan and anything extra to the offset.
     
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  6. TMNT

    TMNT Well-Known Member

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    yes, thats pretty much what I had always assumed, here is my setup

    Loan A - $$$ in redraw
    Loan B - $$$ in redraw
    Loan C - $$$ in redraw
    Offset - $$$ in offset (tied to loan A)


    Ive parked in redraw as Offset is almost full, and obviously I want to reduce the overall interest as its far better than putting into a high interest account such as ING
    can you elaborate, ive never heard the term "loan goes back up"
     
  7. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    You have a balance of $100K on loan B. You credit extra money to the account of $1k. The net balance is $99K. The bank reports you have redraw of $1k. You redraw the $1k later in the year to pay the rates. The loan balance goes back up and is now $100,000 again.

    1. The loan went up when the redraw was used.
    2. The loan is blended. You have two puproses. $99K to acquire XXXX and $1K for paying rates. This may still be deductible v the same property or not.

    Redraws are also realy bad if the ATO looks at the loan they go back to day one and expect to see full docs for every single draw down and redraw. Do a lot of them and they can give up if you cant provide the docs. They dont care where money comes and goes in a offset

    Your solution is Offset 2 and then Offset 3. Not using redraw
     
    TMNT likes this.