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Mortgage featured stories

Offset Accounts versus Redraw for Property Investors.

Investment Loans, Mortgage Broking, Tips
Share

There’s no doubt that Property Investors should be encouraged to build a savings buffer to cover the cost of unexpected maintenance issues and general property expenses.

How that buffer is held and how the funds are used can significantly impact the overall tax deductibility of your loan interest.

There are two main ways that this savings buffer can be held; either deposited to the loan as Redraw or held in an Offset Account, with both effectively having the same impact on your interest cost.

What is an Offset Account?

Essentially, this is a savings account that can be used as an everyday transaction account.  But, with an offset account, the balance is “offset” against your Home Loan.

This means that the interest charged on your Home Loan is the difference between your home loan balance minus the amount held in your linked offset account.

For example, if you have a $300,000 loan and $50,000 in savings, you will only be charged interest on $250,000.

Your repayments remain the same, meaning more of each loan payment reduces the loan’s principal.

The downfall of an Offset Account is that many lenders charge a fee to hold this type of account, so check with your lender or mortgage broker.

Using a separate account, such as an offset account, for all property-related income and expenses can also simplify your accountant’s job when preparing your tax return, as they can see all investment property transactions on one statement.

What is a Redraw Facility?

With a Redraw Facility, any additional payments can be “redrawn” and utilised as required.

As an example, some investment borrowers like to make additional repayments to their investment loan and, in doing so, reduce the loan balance and, therefore, interest cost.  If the loan has a redraw facility, these additional repayments also buffer any unexpected property costs, such as repairs and maintenance.

Redraw facilities are typically only attached to variable-rate home loans, and funds can generally be redrawn without cost, providing the redraw is requested online via Internet Banking.

However, a trap that many investors fall into is that they make additional repayments to their investment loan but then redraw those funds for personal use, such as a holiday or car. Under the “purpose test”, if these funds are not clearly used for investment purposes (i.e., costs associated with an investment property), then the interest incurred on the amount redrawn is now unlikely to be tax deductible.

The original purpose of the loan or type of security property is irrelevant; the ATO is focused on the purpose of funds used when assessing if interest is tax deductible.

So before redrawing funds from an investment home loan for personal purposes, discuss the implications with your accountant.

Better still, if any additional funds put aside could someday be used for personal purposes, consider utilising an Offset Account rather than a Redraw facility.

So, what’s the better option?

Both options have the potential to save you thousands of dollars over the life of your loan. However, an Offset Account is probably the wiser choice. Every dollar in your account is working to reduce the amount of interest you owe, allowing you to pay off your loan faster. Plus, your savings remain separate from your loan, so you can withdraw them at any time without affecting your loan balance. This makes it a better option than a Redraw Facility if you need access to your savings for personal purposes in the future.

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Why three-in-four Aussies turn to a broker for home loan help You might have seen a headline or two about a particular big bank being at war with brokers. Nothing could be further from the truth. Our mission is – and always will be – putting you first. That’s why three in every four borrowers now come to us for help.

Why three-in-four Aussies turn to a broker for home loan help

News
Why three-in-four Aussies turn to a broker for home loan help You might have seen a headline or two about a particular big bank being at war with brokers. Nothing could be further from the truth. Our mission is – and always will be – putting you first. That’s why three in every four borrowers now come to us for help.

Mortgage featured stories

Offset Accounts versus Redraw for Property Investors.

Investment Loans, Mortgage Broking, Tips
Share

There’s no doubt that Property Investors should be encouraged to build a savings buffer to cover the cost of unexpected maintenance issues and general property expenses.

How that buffer is held and how the funds are used can significantly impact the overall tax deductibility of your loan interest.

There are two main ways that this savings buffer can be held; either deposited to the loan as Redraw or held in an Offset Account, with both effectively having the same impact on your interest cost.

What is an Offset Account?

Essentially, this is a savings account that can be used as an everyday transaction account.  But, with an offset account, the balance is “offset” against your Home Loan.

This means that the interest charged on your Home Loan is the difference between your home loan balance minus the amount held in your linked offset account.

For example, if you have a $300,000 loan and $50,000 in savings, you will only be charged interest on $250,000.

Your repayments remain the same, meaning more of each loan payment reduces the loan’s principal.

The downfall of an Offset Account is that many lenders charge a fee to hold this type of account, so check with your lender or mortgage broker.

Using a separate account, such as an offset account, for all property-related income and expenses can also simplify your accountant’s job when preparing your tax return, as they can see all investment property transactions on one statement.

What is a Redraw Facility?

With a Redraw Facility, any additional payments can be “redrawn” and utilised as required.

As an example, some investment borrowers like to make additional repayments to their investment loan and, in doing so, reduce the loan balance and, therefore, interest cost.  If the loan has a redraw facility, these additional repayments also buffer any unexpected property costs, such as repairs and maintenance.

Redraw facilities are typically only attached to variable-rate home loans, and funds can generally be redrawn without cost, providing the redraw is requested online via Internet Banking.

However, a trap that many investors fall into is that they make additional repayments to their investment loan but then redraw those funds for personal use, such as a holiday or car. Under the “purpose test”, if these funds are not clearly used for investment purposes (i.e., costs associated with an investment property), then the interest incurred on the amount redrawn is now unlikely to be tax deductible.

The original purpose of the loan or type of security property is irrelevant; the ATO is focused on the purpose of funds used when assessing if interest is tax deductible.

So before redrawing funds from an investment home loan for personal purposes, discuss the implications with your accountant.

Better still, if any additional funds put aside could someday be used for personal purposes, consider utilising an Offset Account rather than a Redraw facility.

So, what’s the better option?

Both options have the potential to save you thousands of dollars over the life of your loan. However, an Offset Account is probably the wiser choice. Every dollar in your account is working to reduce the amount of interest you owe, allowing you to pay off your loan faster. Plus, your savings remain separate from your loan, so you can withdraw them at any time without affecting your loan balance. This makes it a better option than a Redraw Facility if you need access to your savings for personal purposes in the future.

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Is a tree or sea change on your horizon?

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Is a tree or sea change on your horizon? Fresh air, no bumper-to-bumper traffic and more affordable home prices. There’s plenty of appeal in regional living, including a chance to potentially reduce your home loan.

Is a tree or sea change on your horizon?

News
Is a tree or sea change on your horizon? Fresh air, no bumper-to-bumper traffic and more affordable home prices. There’s plenty of appeal in regional living, including a chance to potentially reduce your home loan.

Is a tree or sea change on your horizon?

News
Is a tree or sea change on your horizon? Fresh air, no bumper-to-bumper traffic and more affordable home prices. There’s plenty of appeal in regional living, including a chance to potentially reduce your home loan.

Why three-in-four Aussies turn to a broker for home loan help

News
Why three-in-four Aussies turn to a broker for home loan help You might have seen a headline or two about a particular big bank being at war with brokers. Nothing could be further from the truth. Our mission is – and always will be – putting you first. That’s why three in every four borrowers now come to us for help.

Why three-in-four Aussies turn to a broker for home loan help

News
Why three-in-four Aussies turn to a broker for home loan help You might have seen a headline or two about a particular big bank being at war with brokers. Nothing could be further from the truth. Our mission is – and always will be – putting you first. That’s why three in every four borrowers now come to us for help.

Why three-in-four Aussies turn to a broker for home loan help

News
Why three-in-four Aussies turn to a broker for home loan help You might have seen a headline or two about a particular big bank being at war with brokers. Nothing could be further from the truth. Our mission is – and always will be – putting you first. That’s why three in every four borrowers now come to us for help.

Mortgage featured stories

Offset Accounts versus Redraw for Property Investors.

Investment Loans, Mortgage Broking, Tips
Share

There’s no doubt that Property Investors should be encouraged to build a savings buffer to cover the cost of unexpected maintenance issues and general property expenses.

How that buffer is held and how the funds are used can significantly impact the overall tax deductibility of your loan interest.

There are two main ways that this savings buffer can be held; either deposited to the loan as Redraw or held in an Offset Account, with both effectively having the same impact on your interest cost.

What is an Offset Account?

Essentially, this is a savings account that can be used as an everyday transaction account.  But, with an offset account, the balance is “offset” against your Home Loan.

This means that the interest charged on your Home Loan is the difference between your home loan balance minus the amount held in your linked offset account.

For example, if you have a $300,000 loan and $50,000 in savings, you will only be charged interest on $250,000.

Your repayments remain the same, meaning more of each loan payment reduces the loan’s principal.

The downfall of an Offset Account is that many lenders charge a fee to hold this type of account, so check with your lender or mortgage broker.

Using a separate account, such as an offset account, for all property-related income and expenses can also simplify your accountant’s job when preparing your tax return, as they can see all investment property transactions on one statement.

What is a Redraw Facility?

With a Redraw Facility, any additional payments can be “redrawn” and utilised as required.

As an example, some investment borrowers like to make additional repayments to their investment loan and, in doing so, reduce the loan balance and, therefore, interest cost.  If the loan has a redraw facility, these additional repayments also buffer any unexpected property costs, such as repairs and maintenance.

Redraw facilities are typically only attached to variable-rate home loans, and funds can generally be redrawn without cost, providing the redraw is requested online via Internet Banking.

However, a trap that many investors fall into is that they make additional repayments to their investment loan but then redraw those funds for personal use, such as a holiday or car. Under the “purpose test”, if these funds are not clearly used for investment purposes (i.e., costs associated with an investment property), then the interest incurred on the amount redrawn is now unlikely to be tax deductible.

The original purpose of the loan or type of security property is irrelevant; the ATO is focused on the purpose of funds used when assessing if interest is tax deductible.

So before redrawing funds from an investment home loan for personal purposes, discuss the implications with your accountant.

Better still, if any additional funds put aside could someday be used for personal purposes, consider utilising an Offset Account rather than a Redraw facility.

So, what’s the better option?

Both options have the potential to save you thousands of dollars over the life of your loan. However, an Offset Account is probably the wiser choice. Every dollar in your account is working to reduce the amount of interest you owe, allowing you to pay off your loan faster. Plus, your savings remain separate from your loan, so you can withdraw them at any time without affecting your loan balance. This makes it a better option than a Redraw Facility if you need access to your savings for personal purposes in the future.

More Stories

Is a tree or sea change on your horizon?

News
Is a tree or sea change on your horizon? Fresh air, no bumper-to-bumper traffic and more affordable home prices. There’s plenty of appeal in regional living, including a chance to potentially reduce your home loan.

Is a tree or sea change on your horizon?

News
Is a tree or sea change on your horizon? Fresh air, no bumper-to-bumper traffic and more affordable home prices. There’s plenty of appeal in regional living, including a chance to potentially reduce your home loan.

Is a tree or sea change on your horizon?

News
Is a tree or sea change on your horizon? Fresh air, no bumper-to-bumper traffic and more affordable home prices. There’s plenty of appeal in regional living, including a chance to potentially reduce your home loan.

Why three-in-four Aussies turn to a broker for home loan help

News
Why three-in-four Aussies turn to a broker for home loan help You might have seen a headline or two about a particular big bank being at war with brokers. Nothing could be further from the truth. Our mission is – and always will be – putting you first. That’s why three in every four borrowers now come to us for help.

Why three-in-four Aussies turn to a broker for home loan help

News
Why three-in-four Aussies turn to a broker for home loan help You might have seen a headline or two about a particular big bank being at war with brokers. Nothing could be further from the truth. Our mission is – and always will be – putting you first. That’s why three in every four borrowers now come to us for help.

Why three-in-four Aussies turn to a broker for home loan help

News
Why three-in-four Aussies turn to a broker for home loan help You might have seen a headline or two about a particular big bank being at war with brokers. Nothing could be further from the truth. Our mission is – and always will be – putting you first. That’s why three in every four borrowers now come to us for help.

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First home buyers turn to Bank of Nan and Pop Nan and Pop have always been good for birthday money, but one-in-10 grandparents are taking their generosity to the next level: helping their grandkids buy a first home.

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Low deposit scheme helps over 150,000 families buy sooner

News
Low deposit scheme helps over 150,000 families buy sooner Whether you’re rat running your local streets, or have a knack for always picking the fast-moving supermarket queue – everyone loves a good time-saving hack. Well, today we’ll let you in on a scheme that could get you into your first home years – yep years – sooner!

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News
Low deposit scheme helps over 150,000 families buy sooner Whether you’re rat running your local streets, or have a knack for always picking the fast-moving supermarket queue – everyone loves a good time-saving hack. Well, today we’ll let you in on a scheme that could get you into your first home years – yep years – sooner!

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Here’s why your borrowing power might soon get a lift Who doesn’t love a tax cut? Most of us are now only weeks away from saving on our tax bills, with Stage 3 tax cuts to kick in from 1 July. But another key advantage is that the tax cuts could give your borrowing power a nice boost.

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Here’s why your borrowing power might soon get a lift Who doesn’t love a tax cut? Most of us are now only weeks away from saving on our tax bills, with Stage 3 tax cuts to kick in from 1 July. But another key advantage is that the tax cuts could give your borrowing power a nice boost.

What you should know before buying ‘subject to finance’

News
What you should know before buying ‘subject to finance’ Not sure if you’ll get the thumbs up for a home loan? But you really, really like that house that just popped up? Making an offer ‘subject to finance’ could be the right move. Here’s how it works.

What you should know before buying ‘subject to finance’

News
What you should know before buying ‘subject to finance’ Not sure if you’ll get the thumbs up for a home loan? But you really, really like that house that just popped up? Making an offer ‘subject to finance’ could be the right move. Here’s how it works.

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What you should know before buying ‘subject to finance’ Not sure if you’ll get the thumbs up for a home loan? But you really, really like that house that just popped up? Making an offer ‘subject to finance’ could be the right move. Here’s how it works.

Not feeling the budget love? 4 ways you could still get ahead

News
Not feeling the budget love? 4 ways you could still get ahead If the latest federal government budget is leaving you hungry for perks and savings, you’re not alone. We’ve had a brainstorm and here are four ways you could start working towards your property goals now.

Not feeling the budget love? 4 ways you could still get ahead

News
Not feeling the budget love? 4 ways you could still get ahead If the latest federal government budget is leaving you hungry for perks and savings, you’re not alone. We’ve had a brainstorm and here are four ways you could start working towards your property goals now.

Not feeling the budget love? 4 ways you could still get ahead

News
Not feeling the budget love? 4 ways you could still get ahead If the latest federal government budget is leaving you hungry for perks and savings, you’re not alone. We’ve had a brainstorm and here are four ways you could start working towards your property goals now.

Low deposit scheme helps over 150,000 families buy sooner

News
Low deposit scheme helps over 150,000 families buy sooner Whether you’re rat running your local streets, or have a knack for always picking the fast-moving supermarket queue – everyone loves a good time-saving hack. Well, today we’ll let you in on a scheme that could get you into your first home years – yep years – sooner!

Low deposit scheme helps over 150,000 families buy sooner

News
Low deposit scheme helps over 150,000 families buy sooner Whether you’re rat running your local streets, or have a knack for always picking the fast-moving supermarket queue – everyone loves a good time-saving hack. Well, today we’ll let you in on a scheme that could get you into your first home years – yep years – sooner!

Low deposit scheme helps over 150,000 families buy sooner

News
Low deposit scheme helps over 150,000 families buy sooner Whether you’re rat running your local streets, or have a knack for always picking the fast-moving supermarket queue – everyone loves a good time-saving hack. Well, today we’ll let you in on a scheme that could get you into your first home years – yep years – sooner!

Here’s why your borrowing power might soon get a lift

News
Here’s why your borrowing power might soon get a lift Who doesn’t love a tax cut? Most of us are now only weeks away from saving on our tax bills, with Stage 3 tax cuts to kick in from 1 July. But another key advantage is that the tax cuts could give your borrowing power a nice boost.

Here’s why your borrowing power might soon get a lift

News
Here’s why your borrowing power might soon get a lift Who doesn’t love a tax cut? Most of us are now only weeks away from saving on our tax bills, with Stage 3 tax cuts to kick in from 1 July. But another key advantage is that the tax cuts could give your borrowing power a nice boost.

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News
Here’s why your borrowing power might soon get a lift Who doesn’t love a tax cut? Most of us are now only weeks away from saving on our tax bills, with Stage 3 tax cuts to kick in from 1 July. But another key advantage is that the tax cuts could give your borrowing power a nice boost.

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Can you remember your home loan interest rate? Where you put your car keys, who won the footy premiership three years back, the new prime minister of New Zealand’s name – all very much socially acceptable things to forget. Your home loan rate shouldn’t be on that list.

Can you remember your home loan interest rate?

News
Can you remember your home loan interest rate? Where you put your car keys, who won the footy premiership three years back, the new prime minister of New Zealand’s name – all very much socially acceptable things to forget. Your home loan rate shouldn’t be on that list.

Can you remember your home loan interest rate?

News
Can you remember your home loan interest rate? Where you put your car keys, who won the footy premiership three years back, the new prime minister of New Zealand’s name – all very much socially acceptable things to forget. Your home loan rate shouldn’t be on that list.