- February 26, 2010
- Posted by: admin
- Category: Finance News
Once a feature of more expensive home loan packages, redraw facilities and mortgage offset accounts come attached to even some basic home loan products these days.
If you have a mortgage, if you want to make your money work smarter, paying money off the top using your redraw or offset facility is the best way to go,
You may need to withdraw the money later, but while it’s sitting there, every single day it’s saving you money, noting that the interest on mortgages is calculated on the daily balance of the loan.
With redraw, borrowers make extra repayments directly off the loan but these are noted separately as additional repayments and can be withdrawn. In contrast, an offset account sits alongside the home loan and the interest earned on that account offsets the interest payable on the home loan. The overall effect is the same.
I personally prefer redraw because you can clearly see what’s happening and gain a sense of achievement from the balance falling. I can see the balance drop but I can also see that amount sitting in the available redraw category.
I am not keen on line-of-credit loans, which are less transparent and require greater discipline to manage and 95% of customers I see are unable to control the debt and end up worse off than they would have been with a standard loan.
Line of credit loan’s don’t have a set repayment and are interest only. Let’s say you set up a $300,000 line-of-credit home loan but the balance is currently $270,000. You’re not required to make a payment as long as you don’t go back over the $300,000 by drawing funds. .
When it comes to investment property, think twice before using an offset. Always pay your home loan off first before considering reducing investment debt.
If you’re living in a property that you plan to turn into an investment property by moving out be very careful and seek tax advice before making any decisions. As you will need to carefully consider the loan structure for what you can and cannot claim as a tax deduction.
A lot of people mistakenly believe they can load up the debt before they leave a property by withdrawing their redraw amounts and use that money to buy another property.
The problem is the Tax Office considers the debt you’ve built up again against that first property to be debt for personal purposes that is, for the purchase of your new home which means it’s not tax-deductible.
It’s not what the debt is secured against that matters but the purpose of the debt.
Holding that money in an offset account instead will sort that out, Then you’re just taking money out of an account to buy your new house.
Source Formula 1 Finance