All Topics / Finance / Redraw and offsets

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  • Profile photo of StoreybuilderStoreybuilder
    Participant
    @storeybuilder
    Join Date: 2016
    Post Count: 45

    Hi everyone,

    I am just wondering if using an offset works differently to a redraw?

    I’ve put a bit in my redraw without thinking about it into my investment property. Would it be best to ONLY redraw this for investment purposes? I just got in the habit with the offset when I fixed the loan I didn’t think to not do this.

    Any advice?

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi SB,

    I am just wondering if using an offset works differently to a redraw?

    A redraw is a loan – an Offset is not. So yes, they are different.

    As I understand it (i.e. NOT advice… ;) if you repaid the $$ into a redraw account, you would need to make a loan application to borrow them again. An Offset account on the other hand is totally separate from the actual loan account. Any $$ placed in the Offset account NEVER form part of the loan – they are simply offsetting the loan amount.

    e.g. If you borrow $50k in a loan, have an Offset account against that loan, and you put $50k INTO the Offset account, it is similar to paying back the loan EXCEPT that the dollars remain yours (all tax paid, and NOT part of the loan itself). So, if you need to withdraw the dollars in Offset, the loan of $50k is still active and owed !! You don’t need to ask to borrow it when taking it from your Offset (as it never was paid off the loan).

    I’ve put a bit in my redraw without thinking about it into my investment property. Would it be best to ONLY redraw this for investment purposes?

    I would think you are right – don’t mix personal withdrawals with investment dollar withdrawals – if the redraw was originally used for investment, continue to ONLY use it for that.

    But hey, I am NOT a financial adviser – so if there are other options, I’d love to hear them too.

    Still learning ;)

    Benny

    PS FOr more about Offsets, take a look here:-
    https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/#post-4697973

    • This reply was modified 6 years, 6 months ago by Profile photo of Benny Benny. Reason: adding a link to Offsets
    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    totallu different

    When you pay money into a loan you are paying down that loan. When you redraw money you are borrowing it.
    Tax deductibility depends on what the borrowed money is used for.

    So if you temporarily pay money into an investment loan when you redraw that money the interest on that portion of the loan will only be deductible if the borrowed money is used for investment or business purposes. If you do use the money for a personal expense then not only is the interest not deductible you will have a mixed purpose loan and you will have to apportion the interest.

    Example
    Johnny has a $500,000 investment loan and inherits $400,000. He has no other debt so he pays $400,000 into the loan on the advice of his bank (they said he would be saving interest!!).

    Johnny then goes out and buys a new house to live in for $400,000.

    Whats the tax implications?

    Johnny can not claim the interest on the full $500,000 loan any more. $100,000 of this loan is now associated with the purchase of the investment property and $400,000 is associated with the payment of the main residence. Johnny can only claim 1/5th of the interest each year.

    At 5% pa, Johnny has reduced his tax deductions by $20,000 per year for the next 30 years or more. That is a potential $10,000 extra cash that he doesn’t have.

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

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of StoreybuilderStoreybuilder
    Participant
    @storeybuilder
    Join Date: 2016
    Post Count: 45

    Thanks guys. Thankfully it’s only $20,000. I’ll just park it until the next loan for an investment property. Separate the loans through a broker and it should be ok, I think. Does that sound right?

    Profile photo of Alistair PerryAlistair Perry
    Participant
    @aperry
    Join Date: 2004
    Post Count: 891

    Offset accounts are very useful because they change the interest calculation but not the loan amount. In most cases investors should have both an offset account, for personal use, and money in redraw or a LOC for investment use.

    Regards

    Profile photo of StoreybuilderStoreybuilder
    Participant
    @storeybuilder
    Join Date: 2016
    Post Count: 45

    Yep that’s what I had before I fixed. I just went into autopilot and used the redraw similarly. Which was a mistake but I’d still like an answer as to the best way to get out of the drama rather than tell me what would have been better, not really helpful afterwards is it?

    So, would a broker just redraw equity on the existing property and use the money in the redraw for a new loan and deposit in the next investment property?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    you can’t unscramble an egg.

    Money paid into the loan cannot be unpaid (well it can be but the tax consequences cannot be undone).

    If you want to reuse that $20k you should split the loan into the 2 portions = $20k and the other. Don’t simply redraw it first.

    Once split you can then redraw the $20k and use it for either a private expense, with the interest not deductible, or an investment expense with the interest deductible.

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

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of StoreybuilderStoreybuilder
    Participant
    @storeybuilder
    Join Date: 2016
    Post Count: 45

    Thanks Terry can always count on you.

    Yes the latter is what I meant. Good to know.

    Profile photo of Alistair PerryAlistair Perry
    Participant
    @aperry
    Join Date: 2004
    Post Count: 891

    If you have any further queries re how different loans work, please add them here. This topic is very important for people who are new to property investing because, as Terry put very succinctly, you can’t unscramble an egg. Mistakes with structuring can be very costly over the life of a loan.

    Regards

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    actually I think you can almost unscramble an egg – I heard a recent story about scientists being able to unboil a hard boiled egg.

    http://www.popsci.com.au/science/scientists-figure-out-how-to-unboil-eggs-,399671

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

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of StoreybuilderStoreybuilder
    Participant
    @storeybuilder
    Join Date: 2016
    Post Count: 45

    Interesting tangent.

    I like the houses in lake titicaca

    http://travelbrochures.org/floting-village-on-lake-titicaca/

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