Homeowners with a loan often hear about offset accounts and redraw facilities as tools to reduce interest costs. While both are effective, they work differently and have unique tax implications. Let’s explore how each option works and what to consider.
An offset account is a bank account linked to your loan. The balance in this account reduces the loan amount on which interest is calculated. For example, if your loan is $400,000 and you have $50,000 in your offset account, you only pay interest on $350,000. This setup doesn’t reduce your loan balance but lowers the interest charged. It’s simple, flexible, and effective for saving on non-deductible interest.
A redraw facility, however, allows you to access extra repayments you’ve made on your loan. If you’ve paid more than the required amount, you can withdraw these funds when needed. While this reduces your loan balance and interest costs, any money withdrawn is treated as a new loan. This distinction can have tax implications.
Tax considerations come into play if you withdraw funds from either an offset account or a redraw facility. If you use the funds for personal purposes, such as buying a new car, there’s no tax deductibility involved. However, if you use redraw funds for income-producing activities—like investing in property—the interest on that portion of the loan may become tax-deductible.
Offset accounts differ in this respect. Withdrawing money doesn’t affect the tax-deductibility of your loan because it doesn’t alter the purpose of the original loan. In contrast, withdrawals from a redraw facility are treated as fresh borrowings, and their tax treatment depends on how the funds are used.
For homeowners considering converting their property into an investment in the future, offset accounts can offer greater flexibility. Keeping savings in an offset account rather than paying down the loan ensures the original loan remains intact, maximizing potential tax deductions if the property starts generating income.
Ultimately, the choice between an offset account and a redraw facility depends on your financial goals, current needs, and long-term plans. Each option has its strengths, so it’s worth discussing your situation with your SWU Group financial adviser or accountant to make the best choice for your circumstances.
Looking for guidance on your financial journey? Connect with us at: FinancialSuccess@simonwu.com.au