Understanding Offset Accounts and Redraw Facilities: Saving Money on Your Australian Mortgage
When it comes to mortgages, two features can significantly impact your interest repayments: offset accounts and redraw facilities. Both can save you money in the long run, but they work in slightly different ways. Let's break down what each entail and how they can benefit you.
Offset Accounts: Saving Like a Seesaw
Imagine your mortgage balance on one side of a seesaw and your offset account balance on the other. The higher the balance in your offset account, the lower the effective balance of your mortgage. This is because the interest is calculated on the difference between these two balances.
Here's how it works:
You open an offset account linked to your mortgage.
You deposit your salary, savings, or any other funds into this account.
The balance in your offset account reduces the amount your mortgage is charged interest on.
Benefits of Offset Accounts:
Reduced Interest: Every dollar in your offset account translates to a dollar less interest you pay on your mortgage.
Flexibility: You can easily access your funds in the offset account like a regular transaction account.
Savings Discipline: Having your savings tied to your mortgage can encourage better saving habits.
Offset Accounts and Investment Flexibility
The key advantage of offset accounts from a tax perspective is their impact on deductible interest. Here's why:
Interest payments on owner-occupied mortgages are generally not tax-deductible in Australia.
With an offset account, the money you hold reduces the effective loan balance used to calculate interest.
Since you're not claiming a deduction for interest you're not technically paying (thanks to the offset), you don't lose out on potential tax benefits if you decide to invest your savings elsewhere.
This flexibility becomes crucial if you plan to use your equity for investment purposes. Let's say you have a chunk of savings in an offset account. You can keep that money readily available to reduce your mortgage interest and free up funds for investments that might offer tax advantages, like rental properties where the loan interest can be deducted.
Redraw Facilities: Taking Back Your Extra Repayments
A redraw facility allows you to access extra repayments you've made on your mortgage. Think of it like a built-in savings buffer within your loan.
Here's the process:
You make additional repayments towards your mortgage, reducing the principal amount owing.
With a redraw facility, you can redraw these extra repayments (usually subject to a minimum amount and lender approval) if needed.
Benefits of Redraw Facilities:
Reduced Interest: Extra repayments bring down the overall loan balance, leading to less interest paid.
Access to Funds: Redraws provide a safety net for unexpected expenses without needing a new loan.
Tax Advantages: (It's important to note that tax implications can vary depending on your situation. Consult with a tax professional for personalised advice.)
Choosing Between Offset and Redraw
The best option depends on your financial goals and how you manage your money.
Offset: Ideal if you have regular savings you want to keep readily available while reducing interest.
Redraw: A good choice if you prioritise flexibility and may need occasional access to larger sums from your extra repayments.
The Takeaway
Both offset accounts and redraw facilities are valuable tools for mortgage holders. By understanding how they work and their unique benefits, you can choose the option that best suits your financial situation and helps you save money over the life of your loan. Remember, it's always a good idea to speak to a mortgage broker or a financial advisor to discuss your specific circumstances and determine which option is right for you.