I have an investment loan with both a redraw and offset.
I was late to the party with the offset account so built up about $30k in redraw before I started depositing into my offset instead.
The ME bank scenario got me thinking (albeit slowly :-/) that maybe i should move what's in my redraw into my offset.
However, it appears there are tax implications and other things to consider?
Has anyone done this before or recommend against it?
Should I Move My Money from Redraw to Offset?
halfnhalf71 on 19/06/2020 - 09:25
Comments
The result is identical interest wise.
IMO leave it it as redraw. It serves as very minor deterrent from using the money anyway. Work on building up your offset again :)
no they are not identical. withdrawing from the redraw account will cause tax issues as you are effectively taking a loan out against your property
I stand corrected then.
Well leave it as is then.
The bank can absorb/pay down loan the money in redraw, it's their money. Offset is your money which offsets interest. In these times, I'd go offset but don't know tax implications.
If you redraw the funds to the offset account and then use the funds (100 %) to make the repayments against the loan facility or use the funds in relation to the investment. This will keep the interest on the loan account 100% deductible.
Using an Offset account is the best approach - whilst minimizing repayments to the principal. This leaves you in full control of your properties equity. You just need self spending control.
As mentioned, using a redraw account has tax implications for the property if it is an investment (or in the future ). If you redraw money for non-investment purposes then the interest expended on that amount is no longer tax deductible in the eyes of the ATO.
Unfortunately you may have already caused yourself these tax implications by using the redraw in the first place…. Best go speak to an accountant!
Agreed, don't remove it now if it's not going to be used for investment purposes. I have redrawn on investment mortgages before, but only to cover other investment related costs so that there is no question about what I used it for. I wouldn't touch it otherwise.
Maybe offset your residential loan?
If you don't have a residential loan, it really goes down to the path you have to do some calculations.
Assuming your annual income is over 37,000/year, each dollar saving on interest will reduce at lease 34cents (32.5%tax+1.5%medicare) when tax return, but you still save 66cents.
But if it puts you into postive gearing, then you may have to factor in FTB, child care subsidy and Child Support if applied and these are hard to calculate. Overall you may still save money. If it were me, I would put money in offset but be careful about the amount so I can stay negative gearing.
I had a redraw option which the bank gave to me. I used it much like I would an offset, taking money when I needed it and repaying it. I did it for years as that's what I thought could be done with the redraw facility.
When I told my accountant about it, he told me to transfer all that redraw to an offset. In my case, the redraw ability sat within my mortgage account, such that even though I may have paid more, technically when I withdraw the additional funds, then the interest incurred for that amount could no be included as a deduction unless it was used on the property for the mortgage.
Eg. if my current mortgage is (-)$100,000, I then deposit $10,000 into that account intending to redraw it (debt goes to $90,000). When I withdraw/redraw that $10,000 the taxable mortgage balance and interest is against the $90,000, not $100,000 although all interest repayments to the bank will be calculated against the $100,000.
Apparently, from a tax perspective, paying money into the principle mortgage account is considered to pay it off (despite the account having redraw ability). The redraw amount is only tax deductible if it is spent on the house.
So now I have offset accounts against all my mortgages, I add and withdraw funds as required, and I deduct the full interest incurred (not proportional). Offset does not come with the limitations of having to spend the money on the property which the redraw does (for tax deduction purposes).
I appreciate all of the advise. It sounds like i have to do some calculations first but it's almost tax time so i might just talk to my accountant too.
I'm about neutrally geared and just short of half of the loan is paid off at the moment. With the combined money in my offset and redraw it would take it down to a bit better than 2/3 paid off.
The redraw would just go straight into the offset to minimise interest and I don't plan on touching it.
My salary goes straight into the offset and i use a credit card (for the points) to pay for everything and then pay that off each month from the offset. That's about as complex as my finances get.
I guess if you really wanted to, you can move it to the offset. But you can only claim the interest inflicted minus the portion that you withdrew into the offset account.