Is an Offset account a good idea in this low interest rate environment? Or is it better to go with a Redraw?

Jatacid on 26/06/2019 - 23:27

I'm buying my first home(appartment) that I intend to live in for at least 5-10 years before turning it into an investment/rental property. Before I buy I'm deciding whether to go with offset or redraw.

On paper, offset seems like it's better for me because I can transact my day to day as normal whilst having it at least reduce my interest. And when I eventually turn it into an investment I haven't shrunk my tax liabilities as much.

But does this change with such low interest rates? At interest rates of 3.5% - 20K just sitting in offset will only reduce annual repayments by 700. So, even just putting 20K into the stock market with a 'slow' year, though subject to more risk, would net 6-10% over the long enough time-line that comes with a 30 year mortgage.

Has anyone recently made that decision between offset vs redraw and have thoughts to share?

Financial

Comments

  • Meho2026 on 27/06/2019 - 01:09
    +3

    Offset
    The interest will basically be the same whether your spare cash is in offset or a repayment but there are more advantages to an offset.
    If you need to redraw there can be fees involved that don’t happen with an offset account.
    When your property changes to investment property you can empty the offsett and use the cash wherever you want. It also allows you to maximise the debt on the investment property without changing the loan product.
    Plus if negative gearing is still around, you can benefit tax wise, although ideally in 5-10 years the rent should cover the expenses.
    If you make extra repayments, on a redraw account, you reduce the loan amount but when the property becomes an investment your extra payments are really locked into that loan. You can’t make a redraw and use that money for anything other than investment purposes without restructuring your loan beforehand, which will cost $.
    Also with a redraw account and extra repayments, technically the lender can change the terms and lock that extra repayment money into the account. Most likely only if they became aware of a change in your financial circumstances but you just can’t trust them not to do it for any other reason they feel like.

  • [Deactivated] on 27/06/2019 - 01:19

    Apply for a loan with both offset and redraw but pay back the excess when the money is in your account when all is finalized and settlement is done. That way if you need the excess money later for home renovations or a new BMW you are paying from a home loan rate not a personal loan or car loan rate. The only downside is you are paying back a loan at the agreed amount not on what is owning ,which also can be a bonus as you are paying extra per month or weekly whatever.

  • MatthewSoul on 27/06/2019 - 01:22

    Obviously offset is better.
    The real question you should ask yourself is if you really want to live in it that long before turning it into investment.
    Usually people live in for 6 months just to fulfil the first home requirement.
    The longer you live in the property the less depreciation and tax deductable expenses.
    Best is just lease it out and use the rent collected to rent another place or room.
    Makes a very big difference when your interest paid is tax deductable plus depreciation of the building.

  • [Deactivated] on 27/06/2019 - 01:27

    Apply for a loan more than you need but don't over extend.

  • MITM on 27/06/2019 - 08:01
    +1

    Can you get a cheaper no frills Home Loan without the offset ?

  • Skramit on 27/06/2019 - 08:18
    +1

    Offset. Every time.

  • [Deactivated] on 27/06/2019 - 08:39

    There is not a lot of difference between offset and redraw. I prefer offset as the money is harder to get and once it's gone in there is a psychological barrier (for me at least) in taking it out, but the offset you have access to it on your card.

  • Numpty21 on 27/06/2019 - 09:20

    I use redraw as I don’t see the benefit of paying fees and haigher rates to have an offfset account.
    I get all my income paid directly into my mortgage account and use credit cards for my day to day spending, then transfer amount owing on cc from my redraw account before the due date.
    Works almost the same as an offset without any additional fees.

    • dogboy on 27/06/2019 - 11:04

      I don't pay fees or higher rate for offset.

      • mskram on 27/06/2019 - 11:06

        Who are you with?

      • Numpty21 on 27/06/2019 - 11:19

        What’s your rate with an offset account?

  • sghetti on 27/06/2019 - 13:10

    All depends on what the lender offers, in Westpac's products (at least the last I saw) you paid a reasonably higher interest rate with an offset attached. To counteract that, you'd need a certain amount in the offset at all times (significant savings etc.) to offset (excuse the pun) the higher interest rate.

    In some circumstances, paying a fee of $25 per redraw on the off chance you need to redraw available funds may work out better than having an offset (if you only have, say, $10k in the offset).

  • Porker on 28/06/2019 - 14:30
    -1

    Something to also be aware of is redraw works fine for primary residences. However, as informed to me by my accountant, using redraw facility for investment properties can be an issue as any money paid off in the mortgage account can't technically be withdrawn. One could start manipulating their tax deductions for the property at the point.

    From an end user perspective, I didn't see the difference with how I managed my money, but the accountant/ATO may have a different take on which account the money sits in such that I now only have offset accounts.

  • mshanann on 29/06/2019 - 09:20

    Read the fine print as well - many offset accounts associated with fixed-interest rate loans for example have a cap.

    CUA for example had a cap of 50k - meaning if your home loan was 200k, and you had 100k in the offset account, only 50k was eligible to be used to offset interest. I'm not sure if this is the case for variable home loans, but it is definitely worth reading the fine print.

    "For Premium Fixed Home Loans, any amount in excess of $50,000 in offset accounts will not be taken into account when calculating interest."

  • atlinus on 06/10/2019 - 18:10

    Is there a limit on how much you can put in your offset account?

    Example scenario if you have a mortgage of 350k, suddenly you were able to get a huge amount of money (inheritance/gambling/investment) is it possible to put a large amout of money in our offset account like 345k so that you only need to pay only pay interest on the remaining 5k ?

    Why you want to keep the mortgage open is if in case you need money for car/personal/emergency/investment-stocks, you only get a lower interest on a home loan compare to other form of loan.

  • Sofie519 on 10/10/2019 - 03:40

    offset = your money protected under gov guarantee. Interest earnt is offset so it dorsnt add to your taxable income and regardless of how low an interest rate environement, offset will always earn more than standard savings account. Eg. if your current home loan rate is 3%, vs the standard savings account rate of 1.5%, you are still 1.5% better off.

    Redraw = banks money (you paid down the loan, and you are asking the bank to lend you back the excess. That is why they are free to charge you or say no)

    People who choose to keep money in offset or redraw generally are unable to assume the loss in riskier investments such as stocks.

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