Some borrowers are unsure about where to put their spare cash. Should it be in an offset account? Or should they put it straight into the loan?
In many instances it makes no difference! If you pay extra money into a home loan or into an offset account it will save you the same amount in interest.
Many borrowers consider an offset account essential. An offset account saves you interest by having your savings offset the loan balance. This reduces the monthly interest payable on the balance of the loan.
Mathematically, the interest saving is exactly the same. $5,000 in your offset account is going to save you the same amount as having $5,000 in the home loan itself.
Offset accounts can be useful but they often attract extra fees from lenders. In some instances not having an offset account and using redraw instead could save you over $10,000 over the loan term.
Using a home loan with a redraw facility can save you the same amount of money. The extra benefit is that it can be achieved without paying high ongoing fees.
Redraw, as the name suggests, allows you to redraw extra repayments made in to the loan. With most lenders, redrawing is free of charge when done online. It is generally not available on fixed rate loans.
While there is no mathematical difference between redraw and offset there are some important tax implications to consider for investors.
This information is of a general nature only and is not considered tax advice. For advice specific to your situation, we recommend you speak to an Accountant or Tax Advisor.
If you pay extra into an investment loan it can cause issues with claiming future tax deductions. For this reason, your tax advisor may recommend that the money is paid into an offset account rather than into the loan intself. This allows you to reduce your interest bill without compromising your future interest deductions.
Loans for Owner-Occupied properties do not have the same issue. Using a redraw facility to save interest without paying extra fees can be beneficial in the long urn.
Do you have an Owner-Occupied loan? Are you currently paying extra for the use of an offset account? If so, it may not be right for you.
If you’d like to look at a home loan health check, we’d be more than happy to look at your home loan. We can look at your current loan set up and see if we can save you money on interest and fees.
To do so, click the button below to ask us about our obligation free mortgage broker service.