Making the most of your loan

Mortgage products have come a long way in recent decades. Originally they were a lump sum provided by a bank that was to be repaid over a 25-year period, but modern mortgage products allow for tremendous flexibility, which can save you significant amounts over the longer term.

Redraw facilities versus loan offset accounts

A redraw facility allows you to access as a cash lump sum the money that you have paid over and above the scheduled mortgage payments. These facilities typically allow a certain amount of redraws each year, with a set fee levied at the time a redraw occurs.

A loan offset account is simply a savings account that is linked to your mortgage account. The funds held in the offset account are “offset” against your mortgage and therefore reduce the level of interest that would otherwise be payable on the loan. Some loans have a “100% offset”, which means that the entire account balance is used to offset the mortgage loan principal, whereas others have only a partial offset that applies. Like with so many things, it pays to be aware of the fine print.

Example

If you hold $50,000 in an offset account and have a $600,000 mortgage, the loan interest will be based on a balance of $550,000 ($600,000 less $50,000). As the amount of money in the offset account is not subjected to income tax, it can be a most tax-effective way to grow your savings.

Which option will suit me best?

If the property is, or is likely to be an investment property at some point, an offset account would generally be the preferred financing vehicle.

This is because while the rent derived from the property is considered income, the expenses related to the property, including interest on the mortgage become tax deductible. By using a redraw facility, the extra repayments reduce the loan principal, which is the amount upon which interest is charged.

If you are going to buy a principal residence which you later plan to convert to an investment property, sensible loan structuring is key. By having all of your savings being directed into the redraw facility on the original principal residence, once you upgrade to a new home you could end up in the undesirable tax position of having a lower deductible investment property loan and a higher non-deductible new home loan.

If you’d like to know about the best loan product to suit your needs please call us, we’re here to help.