When managing your home loan, understanding the differences between offset accounts and redraw facilities is essential. Both offer ways to reduce the interest paid on your mortgage, but they function differently, and their tax implications can affect your future property plans. Let’s break down the basics, the tax implications, and explore a scenario to help you decide which option might be best if you plan to convert your current Principal Place of Residence (PPOR) into an investment property down the track.

What Is an Offset Account?

An offset account is a transaction account linked to your home loan. The balance in the offset account is subtracted from your mortgage balance when calculating the interest charged. For example, if you have a mortgage balance of $300,000 and an offset account with $50,000, you’ll only pay interest on $250,000.

Key features of an offset account:

Accessibility:

Funds in an offset account are typically as accessible as funds in any regular transaction account, meaning you can withdraw, deposit, and make transfers at any time.

Interest savings:

Every dollar in the offset account reduces the balance on which interest is calculated, thus lowering your loan interest.

No tax implications:

The funds in an offset account do not directly affect the loan’s tax deductibility.

What Is a Redraw Facility?

A redraw facility allows you to withdraw extra repayments you’ve made on your home loan. For instance, if you’re ahead on your repayments, you can access the extra funds you’ve paid into your loan. However, unlike the offset account, the funds are not in a separate account; they are simply part of the loan balance.

Key features of a redraw facility:

Limited access: The funds are not as easily accessible as in an offset account. You may need to go through the lender to access them, and some loans may charge fees or impose limits on how often or how much you can redraw. Interest savings: Extra repayments are used to reduce the balance of the loan and, thus, reduce interest. Tax implications: When you withdraw funds from the redraw facility, the Australian Taxation Office (ATO) treats the withdrawn amount as a new loan. The tax deductibility of the loan depends on how the redrawn funds are used.

How They Differ?

The distinction between these two options becomes crucial if you later turn your PPOR into an investment property.

Offset Account:

Neutrality:

The offset account reduces your interest without changing the actual loan balance.

Future deductibility:

If the property becomes an investment property, the interest on the full loan amount remains deductible (provided it meets ATO criteria).

Redraw Facility:

ATO’s view:

When funds are redrawn, it is treated as a new loan. The tax deductibility of the interest on the redrawn amount depends on how the funds are used.

Complications:

If you redraw funds for personal use (e.g., a holiday or car purchase), that portion of the loan is no longer deductible.

Example: Suppose you have a $400,000 loan on your owner-occupied property. Over time, you repay $100,000 into a redraw facility, leaving a balance of $300,000. Later, you withdraw $50,000 for personal use and convert the property to an investment. Now, the interest on only $300,000 is deductible, and the loan becomes mixed-purpose, further complicating tax reporting. Had you used an offset account, you could have withdrawn funds without altering the original $400,000 loan balance, ensuring the entire amount remains deductible.

Still puzzled?

Both offset accounts and redraw facilities can help you save on interest, but the tax implications set them apart, especially if your property plans include transitioning to an investment. If you’re uncertain about which option suits your circumstances, seek advice from a professional to align your financial strategy with your future goals.For tailored mortgage advice, reach out to North Rocks Mortgage Solutions—we’re here to guide you every step of the way!

Author:

Cordelia Jia

Founder & Finance Broker

Cordelia holds a Master of Professional Accounting and a Diploma of Finance and Mortgage Broking Management. With over a decade of experience in the financial service industry, she is a seasoned expert and a reliable partner in navigating your loan journey.

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