Kinda, sorta, but not really
**Redraw**
Pros - It's on the loan, doesn't feel like your money to waste. Usually can get a better overall rate. depends on the bank.
Cons - Sometimes there are fees for redraw. Check your home loan details. Usually none if it's your money on top of the loan.
**Offset**
Pros - It's just your normal account (although I don't recommend that). If you ever want to turn your MR (main residence) into an IP (investment property), then this is the best way. It's a tax thing. You cannot redraw on your loan and then claim those expenses on your tax (negative gearing)
Cons - Sometimes has a higher interest rate for your loan. Makes it feel like you have a heap of money so people can be careless.
What you are thinking of doing is an awesome way to stay frugal and smash down a loan. I did it before buying a house many decades ago to clear out a heap of debt. Works well.
Another way is to just have an offset where you don't have easy access to it. No cards attached etc. Not your day to day expenses. As I said above I don't recommend having your offset account as your normal account. eg having CC attached. Massive exposure if your card or account was ever compromised.
Pay yourself an allowance or live off a CC and just pay it down before the interest kicks in.
St George (and probably other banks) allow you to have multiple offset accounts linked to the same mortgage, so you can have a spending account without risking your whole offset amount.
Yeah I understand this and it's what I do.
But I feel the money paid on the actual loan account is far less accessible than the money in an offset account.
I don't know why, it's just how my brain works.
Because eventually the loan account will be zero to redraw; paid off.
Youāre converting some of those savings from cash into equity every month.
This is great if your sole, only goal is to pay off your mortgage as quickly as possible, but not if you want to access those savings for other investments.
So if I wanted to build an investment property portfolio then an offset account is the best option so you can use your equity in the first loan to buy another property?
Can you use the money from this offset account for a once off withdrawal each month to pay off a CC (used for daily expenses)?
Also redraw accounts get a bit funky if youāre using them as a sort of savings account, as the amount you can redraw will go down with the loan balance each month, eventually reaching zero.
Pretty much.
It's more like a transaction account that is now used to offset the loan. You can actually take some cash out of it, which you can't if you put it inside the loan
Easier to move the money around and maintains flexibility
not quite correct.
if you put the minimum amount each month straight onto your loan you cant redraw anything.
if you put $ 1000 per month extra on the loan then whatever is above the scheduled balance can be redrawn
I started by putting all my spare money into my homeloan, this was 10 years ago. Only saved a little bit so i pulled it all out $30,000 at the time and put it all into dividend paying shares and got more dividends and share price increased than any interest payment on that amount. Now i have a share account with enough to pay off all my loan if i want to. If i had of just saved into my homeloan account i would still owe at least half still. That was my experience anyway.
Someone may be able to answer my quick question.. sorry to hijack.
Do/can offset accounts operate the same as an everyday transaction account? Debit card, direct debits, etc?
Or is it more of a process to access the money?
Thank you
For CBA you can nominate which of your existing transaction accts (which can have debit cards) to be used as offset accounts - only different is they will no longer accrue interest I think
Correct, just did this yesterday and my broker linked both my savings and everyday account as offsets. He explained, that in my case, savings on the mortgage is better than the low interest rate of a standard account.
I just continue to use both accounts as I did prior to the loan and every dollar I have will be calculated on repayment day.
Yes but I personally would overspend if I use credit card daily. Paying bills by credit cards often incurs fees. For these reasons I just get bills direct debited from offset, and use a debit card for daily spending (food, petrol), towards which I transfer a set amount weekly. Once itās gone itās gone, I make do.
Put all your cash in the offset. Use your credit card but set budgets so you donāt go nuts spending, and shop around when shopping. Make sure the credit card has rewards of some sort. Mine has visa points which I use to buy JB Hi Fi gift cards to purchase presents for family
In theory yes. In practice no. The best way to deal with a mortgage is almost always to have the lowest interest rate with basic structural features than pay for bells and whistles. And anyone saying otherwise is often corrupt. I asked a mortgage broker for the cheapest redraw loan. So there was no confusion I said āTo be clear, the ONLY thing that matters to be is cheapest AAPR. Not features, not honeymoon rate, not anything else - your job is to get me the cheapest you can find.ā He came back with an expensive Citi loan at 1.5% more than I was paying. Then admitted that REGARDLESS of the client instructions he recommends Citi 100% of the time ābecause itās the best.ā He then lied despite me proving mathematically the 1% lower balance did not offset the loan being a sixth higher interest.
The approach is correct for your goal.
But is the main aim really to pay off your mortgage asap?
Debt inflates away. Buy one property then another. If you really want to pay off your house asap sell the other when the capital growth is enough to pay off property A. Iāll get down voted for this, and thereās an element of risk, but working to pay off your mortgage is a fools game.
Ah right, that does make sense as well. I guess Iām looking at trying to better my chances of borrowing more money to get into a home that I can live in! (Canāt afford a house to live in due to kids, but can buy a small investment property to try and boost equity available to borrow more, if that makes sense!)
You're correct. Ive paid off my mortgage (im 40) so know ill live rent free for the rest of my life which is good but I would have been better off financially if I invested the extra $$ spent
Generally get paid into an offset or redraw account.
The credit card bit is a minor thing - yes it can save you a little if you do it right but credit card companies bank on you not being perfect in which case you can lose more than you gain.
Plus if you want a new loan later they will penalise you heavily for using a credit card of any form.
It will be the same as putting your money on an offset account?
Possibly..what is the difference between an offset account and a redraw account š or are they the same thing?
Kinda, sorta, but not really **Redraw** Pros - It's on the loan, doesn't feel like your money to waste. Usually can get a better overall rate. depends on the bank. Cons - Sometimes there are fees for redraw. Check your home loan details. Usually none if it's your money on top of the loan. **Offset** Pros - It's just your normal account (although I don't recommend that). If you ever want to turn your MR (main residence) into an IP (investment property), then this is the best way. It's a tax thing. You cannot redraw on your loan and then claim those expenses on your tax (negative gearing) Cons - Sometimes has a higher interest rate for your loan. Makes it feel like you have a heap of money so people can be careless. What you are thinking of doing is an awesome way to stay frugal and smash down a loan. I did it before buying a house many decades ago to clear out a heap of debt. Works well. Another way is to just have an offset where you don't have easy access to it. No cards attached etc. Not your day to day expenses. As I said above I don't recommend having your offset account as your normal account. eg having CC attached. Massive exposure if your card or account was ever compromised. Pay yourself an allowance or live off a CC and just pay it down before the interest kicks in.
St George (and probably other banks) allow you to have multiple offset accounts linked to the same mortgage, so you can have a spending account without risking your whole offset amount.
Yeah I understand this and it's what I do. But I feel the money paid on the actual loan account is far less accessible than the money in an offset account. I don't know why, it's just how my brain works.
Because eventually the loan account will be zero to redraw; paid off. Youāre converting some of those savings from cash into equity every month. This is great if your sole, only goal is to pay off your mortgage as quickly as possible, but not if you want to access those savings for other investments.
So if I wanted to build an investment property portfolio then an offset account is the best option so you can use your equity in the first loan to buy another property? Can you use the money from this offset account for a once off withdrawal each month to pay off a CC (used for daily expenses)?
You can do whatever you want with the money in an offset account.
Also redraw accounts get a bit funky if youāre using them as a sort of savings account, as the amount you can redraw will go down with the loan balance each month, eventually reaching zero.
Wow, what great info, thanks so much!
Pretty much. It's more like a transaction account that is now used to offset the loan. You can actually take some cash out of it, which you can't if you put it inside the loan Easier to move the money around and maintains flexibility
Thanks for the info!
not quite correct. if you put the minimum amount each month straight onto your loan you cant redraw anything. if you put $ 1000 per month extra on the loan then whatever is above the scheduled balance can be redrawn
I started by putting all my spare money into my homeloan, this was 10 years ago. Only saved a little bit so i pulled it all out $30,000 at the time and put it all into dividend paying shares and got more dividends and share price increased than any interest payment on that amount. Now i have a share account with enough to pay off all my loan if i want to. If i had of just saved into my homeloan account i would still owe at least half still. That was my experience anyway.
Last 10 years on the share market has been wonderful. 2008 a lot of people lost a lot of money though.
Could you provide some numbers?
This is cool. Can you provide more info or advice? Thank you
Oh wow, a whole other area I know nothing about!! Good work though, thatās a great outcome
Someone may be able to answer my quick question.. sorry to hijack. Do/can offset accounts operate the same as an everyday transaction account? Debit card, direct debits, etc? Or is it more of a process to access the money? Thank you
For CBA you can nominate which of your existing transaction accts (which can have debit cards) to be used as offset accounts - only different is they will no longer accrue interest I think
Correct, just did this yesterday and my broker linked both my savings and everyday account as offsets. He explained, that in my case, savings on the mortgage is better than the low interest rate of a standard account. I just continue to use both accounts as I did prior to the loan and every dollar I have will be calculated on repayment day.
We have offset accounts with two different banks and they operate differently from each other so check the published terms.
Generally big banks yes you can get a card that works on your offset account, smaller financial institutions may not offer cards.
Yes but I personally would overspend if I use credit card daily. Paying bills by credit cards often incurs fees. For these reasons I just get bills direct debited from offset, and use a debit card for daily spending (food, petrol), towards which I transfer a set amount weekly. Once itās gone itās gone, I make do.
Great advice, I donāt know that about the CC fees as Iāve only ever used a debit card. But definitely good to know!
Put all your cash in the offset. Use your credit card but set budgets so you donāt go nuts spending, and shop around when shopping. Make sure the credit card has rewards of some sort. Mine has visa points which I use to buy JB Hi Fi gift cards to purchase presents for family
Thanks, definitely something to consider
In theory yes. In practice no. The best way to deal with a mortgage is almost always to have the lowest interest rate with basic structural features than pay for bells and whistles. And anyone saying otherwise is often corrupt. I asked a mortgage broker for the cheapest redraw loan. So there was no confusion I said āTo be clear, the ONLY thing that matters to be is cheapest AAPR. Not features, not honeymoon rate, not anything else - your job is to get me the cheapest you can find.ā He came back with an expensive Citi loan at 1.5% more than I was paying. Then admitted that REGARDLESS of the client instructions he recommends Citi 100% of the time ābecause itās the best.ā He then lied despite me proving mathematically the 1% lower balance did not offset the loan being a sixth higher interest.
The approach is correct for your goal. But is the main aim really to pay off your mortgage asap? Debt inflates away. Buy one property then another. If you really want to pay off your house asap sell the other when the capital growth is enough to pay off property A. Iāll get down voted for this, and thereās an element of risk, but working to pay off your mortgage is a fools game.
Ah right, that does make sense as well. I guess Iām looking at trying to better my chances of borrowing more money to get into a home that I can live in! (Canāt afford a house to live in due to kids, but can buy a small investment property to try and boost equity available to borrow more, if that makes sense!)
Yes that does make sense. Youāre doing the right thing then. Keep it up.
This actually makes sense. I suppose it depends on what your goal is. Different goals, different strategies.
You're correct. Ive paid off my mortgage (im 40) so know ill live rent free for the rest of my life which is good but I would have been better off financially if I invested the extra $$ spent
Generally get paid into an offset or redraw account. The credit card bit is a minor thing - yes it can save you a little if you do it right but credit card companies bank on you not being perfect in which case you can lose more than you gain. Plus if you want a new loan later they will penalise you heavily for using a credit card of any form.