Redraw vs Offset vs LOC?

Hi, i am new here and have a question about loan types.

I am trying to wrap my head around these three terms. I have no idea why anyone would want a Redraw facility if an offset offers the same thing with more perks such as at call withdrawals.

Basically, the only difference that Canstar mentions is: "In many ways, redraw and offset facilities are quite similar. The main difference is that the money sitting in an offset account remains at call and easily accessible, whereas the money in a redraw facility, while accessible, isn’t available for same-day, at call withdrawal. There may also be a redraw fee associated with redrawing money from your loan (among the usual other home loan fees)." - What's The Difference Between Offset and Redraw? | Canstar

Some people have both a redraw and an offset. Does anyone know why? An LOC is also quite similar.

 

There are important differences between these features/products when tax is considered.

 

For a new investor like me, I learnt this the hard way. This is my view (others can correct me).

PPOR- good to have both redraw facility and offset account. If you need to quickly buy an investment property and don’t have the time to set up a separate loan for your deposit and borrowing costs, you should use ‘redraw’ facility as the amount your redraw can be later refinanced in a separate loan and can be 100% tax deductible (the painful part is working out your deductible interest prior to setting up the new loan. You have to use one of the complex blended loans spreadsheets- took me hours!) If you use your offset, then you are using ‘cash’ and this will NOT be tax deductible. Essentially you have increased your PPOR non deductible debt. Use offset account to put in extra repayments . This will mean your are not paying down your loan, so you can switch this to an IP later (if your circumstances change). Your debt will not be paid down too much and can therefore enjoy the tax benefits. You can then move the offset funds into your future PPOR.

For IPs, disable the redraw facility and purely use an offset account. If you redraw out of your IP loan (even accidentally) unless it’s strictly for investment purposes, you will have a mixed loan. Again, a painful spreadsheet to deal with. Here the offset account works brilliantly as you can transfer in and out what you like. Also, if you change your mind and want to move into the IP, any extra deposits will not pay down the loan (same as above situation)

LOC- have used this before and it is very flexible, but very high interest rates. Essentially a credit card. The advantage is that it’s quick to establish so again, if you need to make some quick purchases, it’s handy and 100% tax deductible if using for investing purposes. Good thing is that you can convert the LOC into a home loan later for better rates.

 

Almost all variable loans have redraw facilities. An offset account is really just a savings account.

To put it in the most simple terms, here's how most people could use them:

Offset is for savings
Redraw is for equity releases
LOC is something that is rarely worth the expense and most benefits it bestows can be implemented by the previous two features.

 

An LOC is not necessarily more expensive, you may have a dud broker if it is. My cheapest loan is a LOC @ 4.37 %, it was cheaper at the time and it is even much more cheaper now. It has advantages my other loans don't have. It doesn't have the banks own increased interest rates because of the way the contract allows rates to be calculated. Reducing the loan limit below certain thresholds reduces the interest rate, increasing the loan limit past certain thresholds increases the interest rate.

 

Thank you all for your input on this post. Sorry for the late reply.

Would you use a bridging loan for this if you plan on selling the PPOR? It's when you require finance to purchase a second property with the intention of selling the existing one.

Thank you for your explanation of the other terms as well!

If i understand this correctly, the redraw is predominantly best for tax savings rather than financing a new asset/home with the offset capital. Both tools are very similar with the main reason being tax benefits?

 

if you had an offset on an existing loan used for a current main residence and were going to buy a new main residence you would generally want to minimise the new loan as the itnerest would not be deductible and to maximise the interest on the old loan which may then become deductible.
Best way to do this would be to directly use the cash from the offset account.

 

I am not a broker so best to speak to one. Never used a bridging loan before. Is the second property you intend to purchase going to be your new PPOR?

If so, as Terry has mentioned, may be better to use the funds from your offset. When you sell the existing PPOR, you can transfer the funds from the sale into an offset account attached to the new PPOR.

 

Which bank? What’s your total lending amount with this lender?