Forums / Getting Technical / Finance / Redraw from an offset

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  • Walking to run
    Participant
    @alisdair-horgen
    Join Date: 2014
    Post Count: 68

    Does anyone know if when using an offset account and redrawing on it would affect LMI?

    If there was only 5% deposit, with LMI, then I paid it down to 10% but later redrew 5% would that be easy enough or would the draw incur LMI again because theres less than 20% equity?

    Thanks. Merry Christmas.

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,366

    Hi WTR,

    Does anyone know if when using an offset account and redrawing on it would affect LMI?

    The simple anser is “No, it won’t affect LMI at all”. This actually highlights the major difference between an Offset Account and a Redraw. With a Redraw, you have returned the money to the Bank, and being able to access it again is not as simple as with an Offset.

    With an Offset account, it is like having a Savings Account that is NOT joined at the hip to a Mortgage account, but it DOES offset the mortgage while funds exist in the “savings account”. e.g. If you have a $300k mortgage, and have saved $30k in your Offset account, then any Interest owing on the mortgage is calculated against $270k, not $300k. If you had $300k in Offset, then you would owe NO Interest on your mortgage.

    And, AT ANY TIME, you can remove all funds from the Offset, and the mortgage remains as it was (i.e. you owe $300k and Interest on it). This last bit is extremely useful when changing a PPOR into an IP as your cash can become the deposit on a new PPOR, and the original $300k mortgage stays as a (now) tax deductible cost of running the (new) IP.

    There are a few other things to consider (like, will your lender allow a 100% Offset, etc) but by and large, that is how they work. No LMI stuff – you are simply withdrawing your funds from a “savings account”>

    Benny

    Walking to run
    Participant
    @alisdair-horgen
    Join Date: 2014
    Post Count: 68

    Thanks Benny,
    that’s exactly what I wanted to hear.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    an offset account is a savings account and not a loan so your loan balance will not change if you withdraw money/. No effect on LMI.

    Even if you pay the loan down and use redraw (not a good idea usually) then this won’t effect LMI at all either.

    You will only incur LMI if you borrow more than the original amount and the LVR is more than 80%>

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Bangers
    Participant
    @bangers01
    Join Date: 2014
    Post Count: 23

    I don’t mean to derail from the OP – but can someone indicate why the redraw is a bad idea? I’ve not infrequently redrawn any excess payments… THe redraws don’t cost me anything to process at least. What am I missing?

    My offset account offsets an IP, not my PPOR – thus I was channelling extra cash into the PPOR mortgage but redrawing it when the (unfortunately non-investment) need arose.

    Walking to run
    Participant
    @alisdair-horgen
    Join Date: 2014
    Post Count: 68

    Bangers I would think it has to do with deductions.

    Using offset or redraw on an investment has its place but when they say not a good idea it’s back to the negative gearing theory that you save more money and get better roi by having a loan. So reducing that loan means your money isn’t working as hard for you.

    Using offset for non deductible has its place for PPOR because you can use that money and pay less interest parking it in your own home helps a lot. Speeds up things.

    That would be my guess but I’m no expert like terry.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    Yes it relates to creating a mixed loan. If you are redrawing from a PPOR loan then you would need to apportion the interest (assuming the redraw relates to investing). But since it is one big loan any deposit into the loan will come off both portions. This means you will be repaying tax deductible debt. Also it will become increasingly difficult to calculate the % relating to each. If the loan is PI it will be a nightmare.

    Even if you are redrawing for private expenses it is not a good idea as if you were to ever rent the house you would have the same problem.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Bangers
    Participant
    @bangers01
    Join Date: 2014
    Post Count: 23

    Oh dear.

    Not only have I been withdrawing excess, but the house is variably PPOR and IP depending on where I’ve been posted. Definitely need a restructure of my accounts – when I move back in, my extra cash will only be offsetting my IP, thus minimising my tax deductible interest and max-ing my non-deductible.

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,366

    Having “found” this thread again, I wanted to highlight this post from Terryw.
    https://www.propertyinvesting.com/topic/4997918-redraw-from-an-offset/#post-4997951

    It highlights one of those little “GOTCHA” areas that can trip up new and old investors who may not have thought things through completely.

    I have been guilty too of raving over Offset Accounts, how useful they are, and how they retain flexibility… but this one little, yet SO IMPORTANT, point must be kept in mind when taking money from an Offset (or any other) account.

    In short, keep any/all accounts totally SEPARATE in purpose and actively strive to retain their “purity” – i.e. if one account is for Personal Use, only use it for Personal use. If for investment (i.e. deductible) keep that account and any drawings from it ONLY for investment.

    WHY? Terryw says it best right here:-

    Yes it relates to creating a mixed loan. If you are redrawing from a PPOR loan then you would need to apportion the interest (assuming the redraw relates to investing). But since it is one big loan any deposit into the loan will come off both portions. This means you will be repaying tax deductible debt. Also it will become increasingly difficult to calculate the % relating to each. If the loan is P&I it will be a nightmare.

    But wait, there’s more ……

    Terry even warns that, though withdrawing for personal use from an Offset against your PPOR is quite fine (they are your funds, and it is non-deductible debt) WHAT HAPPENS if you then choose to turn your PPOR into an IP ???

    Even if you are redrawing for private expenses it is not a good idea as if you were to ever rent that house you would have the same problem.

    See, even when we THINK we are doing it right, there is always more to learn !!

    And Terryw – THANK YOU SO MUCH for those VERY important extra pieces of information. Awesome post. ;)

    We hear the words about keeping accounts separate – but it is in the understanding just how DIFFICULT things can get if we screw up that really brings it home.

    Benny

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    Thanks Benny

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Colin RiceColin Rice
    Participant
    @fms
    Join Date: 2011
    Post Count: 338

    Bank staff compound the problem by telling people that offset and redraw are the same, clearly they are not.

    An offset used correctly can be a powerful yet simple strategy that is typically not used to its full potential.

    Colin Rice | CDR Finance
    http://cdrfinance.com.au/
    Email Me | Phone Me

    Perth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]

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