Offset VS Redraw
Offset vs Redraw: What’s The Difference?
Most modern mortgages come with a redraw facility and a mortgage offset account. There is always a big discussion around offset vs redraw which is why we’ve compiled all the fast, factual information for you whether you’re a home buyer or an investor.
With a redraw facility you can make additional payments to reduce the outstanding balance of your mortgage, which in turn reduces the amount of interest you pay. However, those additional repayments are not locked away – you can redraw on them at some point in the future. This increases the loan balance, so you’ll pay more interest.
An offset account works more like your day-to-day bank account. However the balance of the offset account is subtracted from the outstanding balance of your mortgage, and you only pay interest on this difference.
So which is the better way to manage your mortgage and minimise interest payments: redraw or offset?
Home-buyers: Offset vs Redraw
For many homeowners it won’t make much difference. The offset account is a bit more convenient as all your cash is working to reduce the outstanding loan amount on which interest is calculated. The redraw facility may require a bit more active decision making regarding how much to pay off or redraw and when. Some banks also set minimum redraw amounts or may charge fees on each withdrawal. On the plus side, the extra effort involved with a redraw facility can provide an element of discipline for people tempted to dip a bit too readily into the available funds in the offset account.
Investors: Offset vs Redraw
If you are borrowing to invest, however, choosing between redraw and offset can have a significant impact on your tax bill.
Imagine you buy an investment property and have a loan of $500,000. The interest on this loan is tax deductible. You then receive a windfall that allows you to pay off $100,000, leaving a loan balance of $400,000. Soon afterwards you redraw $50,000 to splurge on an overseas holiday. The loan jumps to $450,000, but as the redraw is for personal use the loan amount attributable to the investment property remains at $400,000. You won’t be able to claim a tax deduction for the interest on the $50,000 redraw. What you will likely end up with is a headache from trying to manage the personal and investment components of the loan as future repayments or redraws are made.
Now imagine that you deposited your extra $100,000 into your offset account. The bank subtracts this from your loan balance of $500,000 and only charges you interest on the $400,000 difference. The crucial difference is the loan amount is still $500,000 and all attributable to the investment property. The withdrawal of $50,000 from your offset account is unrelated to the investment arrangement. Yes, you’ll pay interest on the full loan amount of $450,000, but it will remain fully tax-deductible.
Even if you are not a current investor but there’s a chance your existing home may turn into a future investment property, the same principle applies. This is where it could get very tricky.
Provided you have the discipline to manage your offset account, it can provide more flexibility than the redraw facility and could save you costly tax issues. To be certain about what suits you best, always seek professional advice.
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Budgeting is necessary for everyone and you can make it easier with these tips and tricks.
Make sure to check out our budgeting tool here to see how much you spend and how much you can save.
Top 10 budget tips
1 Get An App: Are you excited to pull out receipts, scribble figures into tables and assess your spending in painstaking detail? Didn’t think so.
Thanks to apps, you don’t need to anymore. There are dozens of these clever tools available for free, and they can automate the hard parts. Only 15% of Australians use them, and those that do swear by them. With an app, all you have to do is key in your expenses of the day and let the app handle the rest. At the end of the month it will have everything in one place for you to review. Money Brilliant will help you get better deals, give you alerts when you’ve missed a bill and gives you insights into your spending.
2 Keep Your Receipts: Ask for receipts and hang on to them. They’re naturally useful as evidence for insurance purposes and claiming tax deductions or refunds, but can also help you manage your budget.
Receipts are powerful little scraps of paper, clearly showing the whats, wheres, whens and hows of each transaction. They might show if you’re habitually overspending when using a credit card, are consistently paying too much for something or if one location in particular tends to bring out the big spender in you.
3 Work The Bank: Budgeting is all about saving, and saving is all about finding a system that works for you. In essence, as long as you’re putting money in the bank at the end of each month you’re making a positive difference and can look for ways to put away more than the month before.
Everyone’s financial situation is different, but banks will almost always have to be part of your budgeting system, so you might as well make sure you choose the optimal one. Consider a high interest savings account that might let you put more away. It may be a small difference, but the sooner it starts the sooner it can grow. To make sure it’s a good switch, double check with a savings calculator before you sign anything.
4 Review Your Spending: Did you know you can save money by spending less? This unhelpful tip is brought to you by many experts, most of whom don’t have a problem with spending.
The truth is that having a budget doesn’t mean you need to cut out “bad” spending. Instead, you should simply budget for it. Set yourself a daily, weekly or monthly allowance for certain expenses and then stick to it. You can set a budget to suit your habits, but you can also let your habits shift to suit your budget. You don’t have to cut these expenses from your routine when you can adjust them instead.
5 Get A Budgeting Buddy: If you’re fighting a war against your own spending habits, call in some backup. Budgeting is easier with a support system. It could be a partner, friend, family member, financial coach or almost anyone else in the same boat as you. They can help keep you on track if you find yourself backsliding or overspending, so don’t underestimate the power of moral support.
And don’t underestimate how much you can learn from each other either. Share useful tricks that worked for you and they might do the same. Support groups like Debtors Anonymous mean almost anyone can find an understanding crowd to help them change their habits.
6 Use Cash: Keep spending simple with cold hard cash. No credit, no fees and no way to spend more than you have.
Set aside a certain amount of money each week and withdraw enough cash to see you through, with whatever kind of discretionary spending buffer, if any, you think is right. Save your credit cards for emergencies and don’t buy it until you can pay for it in cash to automatically change your own spending habits.
7 Leverage Micro-Investments: Micro-investments can simultaneously let you make investments and more easily balance the budget. The premise is simple: whenever you buy something, round it up to the nearest dollar and invest the excess. This adds up over time, letting you continually invest even if you’re living on a tight budget. For example, round up a coffee that costs $2.60 and deposit the extra 40 cents. Do this every day and over the course of a year you’ve invested $146 with relatively little effort. This can all be done near-automatically with groups like Raiz Invest (previously Acorns Australia), or with any one of a number of other options. Build micro-investments into your schedule to invest on a budget.
8 Pay Yourself: Paying yourself might seem like a surprising way to save money, but a good budget can allow for it. Instead of drawing from your living expenses account for luxuries, consider setting up a special account for these. Many banks will let you segment and set up your accounts as desired. Pay 10% (or however much you can) of your typical income into this special fund every time you get paid, and use only this account for non-budgeted expenses. Consider keeping up with a separate savings account as well and combining the two to pay for big expenses like holidays.
9 Set Achievable Goals: Have you ever met someone who made a new year’s resolution to get fit, then when you next saw them they were smoking a pack a day and having ice cream for breakfast? The same thing can happen with budgeting, which is a lot like dieting in two main ways.
You need to set realistic goals. Don’t plan on halving your body weight in a week, and don’t plan on cutting your budget by 80% unless you actually think it’s possible. The money has to come from somewhere.
You need to stick with it. A lot of people diet until they lose weight, then quit the diet and immediately balloon right back to their former size. Likewise, a lot of people budget carefully until they’re out of debt and then figure they can go right back to their old ways. If circumstances change, adjust your budget rather than throwing it out.
– 10 –
Adjust Your Goals If You Don’t Meet Them: If you managed to perfectly nail your budget down to the last cent on your first try then neither this guide, nor this world, was meant for you. If you didn’t, you’re just like everyone else. Some of the things that end up in your budget might simply be unfeasible or inaccurate. You may have misquoted how much you spent, set an unattainable budget or forgotten to consider important expenses. Don’t panic – it’s okay to make amendments. This is not cheating, and is in fact a normal part of keeping a budget. Your spending needs and financial situation will naturally evolve and your budget needs to keep up. Making amendments is a learning opportunity, and a chance to look at your expenses in a different light.
Don’t think of your budget as a necessary evil or a chore, but instead as a powerful ally in the fight for savings. If you haven’t already created a budget and aren’t doing anything else at the moment, start now.
A solid target can help you focus your budget. Know your financial goals.
Pick your weapon of choice, in the form of your preferred budgeting apps or tools
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At the meeting you also receive your 6 month money app subscription PLUS access to our online education library. You will receive this even if at the end of the consult you do not wish to proceed with creating a financial plan for your family.
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Work Life Balance
Work/life balance is something many of us continuously strive for but rarely feel we achieve. Here are some simple tips to help you on your way.
1 Look after your health: Recognise the signs of imbalance, such as stress and fatigue, and respond to them accordingly. A balanced diet, regular exercise and sufficient sleep can help you to remain healthy and happy.
2 Manage your time: Time management doesn’t just happen; it requires both planning and effort. You can begin by prioritising all tasks and concentrating on those that are most important. Using deadlines and giving yourself rewards can also help to keep you on track.
3 Learn to say ‘no’: Next time you are asked to take on more than you can handle, or work back late, don’t be afraid to say no. Delegation is another useful skill, so consider getting the kids to help out with the housework, or ask for a colleague’s help to shoulder the work burden.
4 Investigate flexible employment options: Opportunities such as flexible working hours and the option to work from home may be offered by your employer. If you want to negotiate a flexible working arrangement, be sure to explain to your employer the benefits to the organisation.
5 Take time out for yourself: If you don’t look after yourself, no-one else will. Allocate sufficient time in your week for ‘me time’. It can improve your well-being, as well as your relationship and your career. If you regularly each lunch at your desk, decide to go to the closest park or a quiet space instead, even if you only do it three days a week. Your afternoons will be far more productive.
6 Use your leave: If you’re feeling run-down, don’t hesitate to use any leave entitlements owing to you. That old saying “change is as good as a holiday” is rubbish! There’s nothing as good as a holiday than a holiday! You will return reinvigorated and far better focused.
7 Embrace technology: Technology can help you to become more efficient, for example, by ordering groceries online, which can free up valuable time to spend doing the important things in life. However, technology can also be a time-waster, so make sure you stay in control of how much personal “screen time” you have every day.
With a bit of focus and discipline, these steps will put you in the right direction to achieve a better work life balance.