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Members of the finance broking industry were present at this week’s Senate inquiry into the financial regulatory framework and home ownership, making representations about how to make getting a home loan easier for first home buyers.
One of the big hurdles for first home buyers is a standardised “serviceability buffer” built into repayment calculations, which is designed to ensure borrowers can keep making repayments if interest rates rise. Whilst this buffer has obvious merit, particularly as rates kept riding in recent years, with the rates now steady (hopefully!), the industry is lobbying to have the buffer reduced to make getting a loan easier for firsts home buyers.
I’m nit anticipating any change soon!
In this week’s newsletter, we explore the differences between offset and redraw facilities linked to loans.
While redraw facilities and offset accounts both offer ways to reduce the interest on your home loan, they also have distinct differences worth understanding.
The Similarities:
- Both options can help lower the interest you pay on your home loan.
- They both contribute to paying off your loan faster.
- Typically, they are available with most standard variable rate loans.
The Differences:
Offset Account – This is a separate deposit account linked to your home loan. You can deposit your salary and transfer funds from other accounts into it. You can also use it for daily expenses, like groceries or bills, via a debit card, making it a flexible option for managing your finances while reducing loan interest.
Redraw Facility – This isn’t a separate account but a feature attached to your loan. It allows you to access any extra repayments you’ve made. However, it’s generally less flexible than an offset account. For instance, you may not be able to withdraw funds from an ATM or use a debit card, and some lenders may impose restrictions like minimum redraw amounts.
Tax Implications:
If you decide to rent out your home in the future, it’s important to consider the tax implications of these options:
- With a redraw facility, any amounts redrawn for personal use, such as holidays or car purchases, may affect your ability to claim the interest on the loan as tax-deductible.
- With an offset account, withdrawing money for personal use doesn’t impact the tax deductibility of your home loan interest.
If there’s a chance your home may become an investment property, it’s wise to seek financial advice to determine whether a redraw facility or an offset account is the best fit for reducing interest.
Remember, everyone’s financial habits are different, so what works for one person may not work for another.
Variable
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.
1 Year Fixed
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.
