Offset accounts, redraw facilities and negative gearing
Which might suit you?
Offset accounts and redraw facilities are both loan extras which could save you thousands and shorten the life of your Australian home loan. Your friendly ITP Home Loans broker is experienced in all three of these processes, and can help you decide if any of them would be right for you.
What is a mortgage offset account?
A home loan offset account is a great way to lower your home loan repayments and lessen the life of your mortgage while you save. After you take out a standard home loan, a transaction account is launched and linked to this loan. This transaction account works like any other savings account, with ATM and electronic transfer facilities. The funds in this account are offset every day against the balance of your loan, so your mortgage interest is lessened as a result. For example, if you have a $300,000 loan and $20,000 in your offset account, you’ll only be charged mortgage interest against $280,000 instead of $300,000. Tip: a particularly painless way to save money is to have your salary paid straight into your offset account. Other benefits include:
- An offset account with the same interest rate as your mortgage means that interest earned in this account will also offset your mortgage interest, resulting in more savings for you
- The interest earned on your offset account is tax free, unlike standard savings and cash investment accounts
What is a redraw facility?
When you have a redraw feature on your home loan, you can withdraw any extra money you’ve contributed to repay your loan. Your redraw facility balance is made up of whatever extra payments you’ve made. There are some major benefits to a redraw feature on your home loan:
- Your extra repayments earn compound interest. This is usually higher than the interest rate you’d receive on a standard savings account.
- Money in your redraw facility contributes to faster repayment of your home loan, while being available as a contingency to pay other costs – e.g. credit card debts
- The interest that you save on your loan by having funds in your redraw facility is not subject to tax, unlike cash investments and ordinary savings accounts
The downsides? There are sometimes withdrawal restrictions and limits, plus fees associated with a redraw facility. However, these features tend to help you save, rather than spend your redraw balance. A redraw feature is of most benefit if you are disciplined with your finances.
What is negative gearing?
Negative gearing is a financial tool used by property investors to maximise tax benefits and profit from capital gain. As an investor you secure an interest only, or low interest loan for a property purchase. The rental returns on this property are not enough to cover the high interest repayments on the loan, but you can claim the loss as a tax deduction. Meanwhile, the value of the property is (hopefully) rising, so that you can eventually sell it for a profit.
Thinking about negative gearing? Speak to one of our ITP professionals.
Still not clear about aspects of redraw facilities, negative gearing or offset loans? Your ITP Home Loans advisor is more than happy to go through it all with you, and see what would suit your circumstances. Plus get you the most suitable home loan deal, at no additional cost to you. Get in touch with us today by emailing us, or make an appointment to see an advisor face to face. Alternatively, give our helpful ITP Home Loans consultants a call today on 1300 387 487.