When you take out a variable rate
home loan most lenders will offer you both a 100% Transactional Offset
Account as well as a Redraw Facility.
Whether you're a home owner with
a mortgage or a property investor with an investment loan,
you might be able to use these loan facilities to make genuine savings on
your interest and your tax.
Here are some tips on how!
100% Transactional Offset Accounts
These are fundamentally the
same as your average transaction account. Your lender will give you a
debit card and you will be able to use this account for your everyday
spending.
The only difference between this
facility and your regular transaction account is that this account will
be linked to your home loan. This means the money you park in your offset
facility won't accrue any interest. Instead the balance of your offset
account is subtracted from your loan total, meaning that you pay less interest on
your debt.
You will be saving money
on your home loan interest rather than earning interest
on your savings. Because home loan interest rates are generally higher
than those of savings and transactions accounts this strategy will provide
you with greater financial benefit.
Eliminating the interest you
would otherwise earn on your savings may also save you money on your tax.
Tips for Home Owners
As a home owner I would suggest
using your 100% Transactional Offset Account as your spending account, while
using your Redraw Facility as your savings account.
Tips for Investors
As an investor I would suggest
using your 100% Transactional Offset Account as both a transaction account and
a savings account. I recommend investors avoid Redraw Facilities, and I will explain
why below.
Redraw Facility
If you are paying off your home
loan for your principal place of residence and you are looking to save at the
same time a Redraw Facility can be a great savings tool.
This facility allows you to use
your surplus funds to make extra payments on your mortgage. You'll be able
to store your money within your loan account as if it
were a savings account and then withdraw these funds at a time of your
choosing. Like the offset account, using your Redraw Facility will mean that you won't
accrue interest, and instead you will reduce your loan
interest.
Tips for Home Owners
Redraw Facilities are usually
less accessible than your offset account so this makes them more suitable
to use as a savings account. I recommend storing both your savings and
your billing expenses in your Redraw Facility.
Tips for Investors
As an investor it is best to
avoid Redraw Facilities. The reason being is that withdrawing money from a
Redraw Facility on an investment loan can complicate the tax-deductibility of
your loan.
If you withdraw money from an
investment Redraw Facility for a non-tax-effective purpose then the money added
back onto your loan may not be tax-deductible and this means you may not be
able to subtract all of your loan interest from your taxable income**.
The majority of lenders will
offer these facilities as a part of your loan package. If you have an existing
loan you may be eligible to open one or both of these facilities, so speak to
your lender and find out about what loan facilities are available to you!
** For your particular tax
position it is always best to consult your accountant or registered tax
advisor.
Don Farquharson,
Loan Solution Expert
Owner & Principal Lender of All About Loans
Photo Credit: https://www.flickr.com/photos/pictures-of-money/
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