PAY LESS INTEREST On Your Home Loan! Offset vs Redraw Facility Explained

Summary

This episode explores the financial options of offset and redraw accounts in Australia, crucial for homeowners and investors. It discusses the benefits and drawbacks of each, emphasizing liquidity, control, and tax implications of offset accounts, and the potential for better interest rates with redraw facilities. The host, PK, recommends offset accounts for most due to their flexibility and lack of tax issues, but acknowledges scenarios where redraw accounts might be preferable.

Takeaways

• 🏡 Offset and redraw accounts are unique to Australia and are used to manage home loans.
• 💵 An offset account reduces the interest on a loan by subtracting the amount in the offset account from the loan principal.
• 💳 A redraw facility also reduces loan interest but involves placing extra funds directly into the loan, making it harder to withdraw the money quickly.
• 📈 Offset accounts provide liquidity and control, allowing quick access to funds without needing bank approval.
• ✅ Offset accounts do not require approvals or forms to access money, unlike redraw facilities which may require formal processes.
• 💸 Offset accounts typically do not have minimum withdrawal amounts or associated fees, unlike some redraw accounts.
• 🛡️ Offset accounts have no tax implications, maintaining the full tax-deductible amount of the loan.
• 📉 Redraw facilities may offer better interest rates compared to offset accounts.
• 🏦 Redraw facilities are not considered assets, which can be beneficial for asset testing purposes.
• 💼 Some offset accounts come with annual fees, and not all allow 100% offsetting of the loan amount.

Q & A

What is the main topic discussed in this video script?

The main topic discussed in this video script is the comparison between offset accounts and redraw accounts, specifically in the context of home loans in Australia.

What is an offset account and how does it work?

An offset account is a separate account linked to a home loan, where the balance in the account reduces the loan's principal amount for the purpose of interest calculation. For example, if you have a $500,000 loan and $100,000 in your offset account, you only pay interest on $400,000.

How does a redraw account differ from an offset account?

A redraw account is not a separate account but a facility where extra repayments on a home loan are stored and can be redrawn later. It reduces the loan balance and thus the interest payable, but unlike an offset account, it may not be as easily accessible and could have certain conditions or fees associated with it.

What are the advantages of using an offset account according to the script?

The advantages of using an offset account include liquidity and control over your money, no need for bank approval to access funds, no minimum redraw amount or associated fees, and no tax implications for the money in the account.

What are some potential downsides of using an offset account?

Some potential downsides of using an offset account include possibly higher interest rates compared to loans without an offset facility, being considered an asset which could affect pension eligibility, possible annual charges, and in some cases, not being able to offset 100% of the loan amount.

What is the script's recommendation regarding the choice between an offset account and a redraw account?

The script recommends using an offset account almost 100% of the time due to the control and liquidity it offers, unless there are specific circumstances such as a significantly better interest rate on a redraw facility, or the need to avoid asset testing for pension purposes.

What is the potential tax implication when using a redraw account for non-investment purposes?

If you use funds from a redraw account for non-investment purposes, such as personal expenses or luxury items, the amount withdrawn may reduce the tax-deductible portion of your home loan, affecting your ability to claim tax deductions for the loan.

How does the script define liquidity in the context of offset and redraw accounts?

In the context of offset and redraw accounts, liquidity refers to the ease and speed with which you can access the funds in the account. An offset account typically offers greater liquidity as you can access your money instantly via internet banking, whereas a redraw account may require an application and approval process.

What is the role of the presenter, PK, in the video script?

PK is the presenter who helps people build passive income through property investment, and in this script, he educates viewers on the financial aspects of home loans, specifically the pros and cons of offset and redraw accounts.

What is the presenter's view on the importance of the content consumed by viewers?

The presenter believes that the quality of the content consumed now will dictate the quality of life in five years, emphasizing the importance of educating oneself on financial matters like home loans and investment strategies.

How can viewers further engage with PK and his content?

Viewers can further engage with PK by subscribing to his channel, listening to his podcast 'Australian Property Mastery with PK' available on Spotify, Google, and Apple, and joining his Facebook group which has a community of nearly 30,000 members.