Redraw and Offset Accounts – How they can save you money

Tax Minimisation and savings

Mortgage and Finance Broker Grant Robertson provides the following advice to Plant and Associates clients:

Offset accounts and redraw facilities work in similar ways; they both allow you to reduce the balance of your home loan, and therefore the interest charged, by applying extra money to your debt.

Redraw facilities allow you to deposit spare income into your home loan account, allowing you to redraw a sum equal to the extra repayment amounts in future.

In the meantime, the extra money paid will lower the amount of interest charged while still giving you access to your money.

However, there may be restrictions on how much money can be withdrawn and when.

“For redraw, it depends on whether the facility applies to a fixed-rate or variable loan,” Moses says. “Most institutions only allow redraw from a variable-rate loan, or fixed-rate loan but with limited access.”

It is important to find out how a loan’s redraw facility works before taking it on, as the fees and restriction attached might outweigh the benefits of interest savings.

Deciding between an offset account and a redraw facility on your home loan largely depends on how accessible you need your extra money to be.

Offset accounts are like savings accounts that function alongside your home loan. You earn interest on the money in the offset account and you often have a debit card attached for simple withdrawals.

“Let’s say that you are paying five per cent interest on your home loan and earning two per cent interest on your offset account,” explains Heritage Bank NSW State Manager Paul Moses.

“In a offset setup, the difference would be 3%, but would mean that the 2% interest that you earn is coming off the interest you are paying on your home loan.”

With 100 per cent offset accounts, you earn interest equal to the interest you are paying on your loan. Rather than earning savings account rates, you are earning home loan account interest rates on the money held within the offset account.

“Let’s say you have $10,000 in your 100 per cent offset account. Instead of paying interest on your $100,000 loan, you are only paying interest on $90,000,” Moses says. “That’s probably the best type to have, if you are looking at offset accounts.”

Offset accounts, like many savings accounts, often come with account fees, but the fee may be worth the interest savings and the added flexibility compared to redraw facilities.

“There are less restrictions attached to 100 per cent offset accounts, they’re very flexible. But really, it does just depends on each lender,” Moses says.

Finding a loan that matches your needs is a lot easier with an expert on your side. Speak to Grant Robertson 0466 977 170 or email: grant.robertson@astrafinacial.com.au to find a loan that matches your current needs and future plans.

Grant Robertson Mortgage and Finance Broker Dip. Finance and Mortgage Broking Management

Phone : 0466 977 170 Fax : 07 5525 3887 Address : PO Box 1186, Mudgeeraba, QLD 4213 Email: grant.robertson@astrafinancial.com.au

Super or Mortgage

 Super versus mortgage: And the winner is… Article by Adam Kennedy

The pros and cons of using spare income to pay more off your mortgage or increase your super needs to be weighed up, but with both strategies the winner could be your financial future.

Choosing to channel more of your cash into either your mortgage or your super can be a fork in your financial road and leave you asking which path you should commit to.

The direction you take depends on a few factors such as your age, how much you earn, your level of debt and your income tax rate.

If you are in your twenties, for instance, you may not want to save for a retirement that is 40 years or more away. A better strategy might be to invest in a home where you can build some equity by the time you are nearing your forties and considering a retirement strategy.  However, the older you get, the more you might want to invest in your superannuation and begin the transition to retirement financially.

 Issues to consider if you take the mortgage route:

•Paying no tax on growth in the value of your family home

•Access to redraw facilities if you need a quick flow of cash

•Equity which you can borrow against

•Reliance on the property market as a long–term strategy

•Changes to interest rates

Issues to consider if you send more money your super’s way:

•Boosting retirement income

•Tax–effective as tax on investment returns is capped at 15%

•Tax–effective when you salary sacrifice

•Potential benefits of Federal Government co–contributions if you earn less than $46,920

•Inability to access funds if you are under retirement age

Questions to ask yourself…

If you are at the time in life when you feel it’s better to place your cash into super, here are some steps to help you decide how to put a strategy in place:

How much do you owe on your mortgage?

Sit down and do your sums to figure out how much money is going into repayments, and how long it will take you to pay off your mortgage.

How is your mortgage set up?

Do you have an interest–only strategy at the moment and how long is the life of your loan? It might be worthwhile considering if this needs to be changed. Switching to an interest only loan may also give you more cash–flow that can be invested into your super.

Is there cash looking for a better home?

You may have more money floating around than you think and some can go into growing your super balance.

Do you have the capacity to salary sacrifice?

Your employer may allow you to salary sacrifice some of your income which will be taxed at a maximum rate of 15%, saving you a tidy sum in tax if your income is currently being taxed at a higher rate.

In conclusion…

It’s wise to speak to a professional who has the necessary tools at their finger tips to assess your personal situation and identify which options and blend of strategies will place you better in your retirement.

Have a good week.

Posted in Home Loans, Investments, Super