In this lesson, we discuss the differences between offset and redraw facilities. What are they exactly, and what are the differences?
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Prefer reading? Here is a transcript of the video:
Ryan here, and in today’s lesson, we’re going to go through the difference between offset and redraw facilities. There are some key differences between the two, and it’s very important that you understand the differences before you deep dive into the loan product selection.
So, I have created a quick diagram that I go through a lot with my clients. So, we can talk through the differences between the redraw and offset accounts. So, in this diagram, we have a client with a $500,000 loan and an offset account with a $25,000 balance.
Now an offset account is just a fancy word for a transaction account. The only difference is it is linked to the variable rate loan in the background. Therefore, as per the diagram, $25,000 in the offset account is attached to a variable rate loan of $500,00. You’re only paying interest on $475,000. Now, the thing I like about offset accounts is it’s a normal transaction account meaning. You can have all your income going into the offset account and all your expenses going into the offset going out of the offset account.
The downside to an offset account, typically, speaking, they come with annual package fees anywhere between $180 all the way up to $400.
Now a redraw facility, a redraw facility achieves exactly the same thing at the end of the day. However, the $25,000, instead of it sitting in a separate account like it is down here it’s going to sit directly in the variable rate loan, meaning if you ever need to access that money, you will then need a transfer out of the variable rate loan to a transaction account. It is a bit more of a manual process compared to the offset account.
Now, if you like to set and forget and don’t want to have to move your money around when you need it, an offset account probably suits you best. A variable rate alone with just a redraw facility typically comes with lower annual fees as well.
So, be mindful of that too now that I guess the negative of a redraw facility could lead to some taxation complications down the track, and I’m not going to go into those today but would obviously recommend you receive some advice in regard to which structure suits you best with your overall intentions on the property.
Well, I hope that has provided some clarity on the differences between the two. Please, as always, reach out to us. If you need any advice on your individual circumstances, look forward to talking to you in the next lesson.
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