With the decision by the Reserve Bank of Australia to reduce the official cash rate to 0.5, the banks are looking at making sure they pass on the benefit to their customers.
It will be in your best interest to compare the different home loan rates that the lenders offer to make sure that you get the best deal available.
The best way to compare home loans is to ask for a key facts sheet from different lenders. The key facts sheet will give you the information you need, in a set format so you can directly compare features, interest rates, and fees.
Some of the different home loans available:
Which is the smartest option for Home Loans?
The reality is, most borrowers will ask for a redraw or offset facility when they apply for their home loan, even if they don’t fully understand the benefit that is applied. It is important that you know what the difference is before you apply.
Some lenders charge a fee to maintain an Offset account and some lenders have restrictions on the minimum amount of money you can redraw from your home loan or charge a fee each time you need to access funds.
Want to buy a home and not sure where to find the
Best Home Loan Rates?
Let’s look at simplified versions of how these two facilities work and how the benefit is applied to your home in each instance. Note, a redraw facility sits within a home loan whereas the offset account is a linked external account.
Having a redraw facility allows you to pay extra money into your loan that you can take out (or redraw) later if you need it.
The extra money you pay into the loan reduces your loan balance which reduces the interest you pay. Your loan balance will still reduce each month according to the terms of your loan.
Credit providers may impose conditions or a fee to redraw funds. You should check what conditions and charges apply to your loan.
This is a savings or transaction account linked to your home loan. Your account balance is taken off the amount you owe on your home loan, reducing the amount of interest you pay. You can use an offset account for savings or as an everyday transaction account.
For example, if you have a home loan of $500,000 and a balance of $20,000 in your offset account, you only pay interest on $480,000.
If the balance of your offset account is low, the additional costs may outweigh any benefits you get from having it. Be realistic when calculating the expected benefit an offset account may give you.
Now, let’s look at the benefits these two options offer. As benefits revolve around taxation, Ian Wood of Value Beyond explains below the advantage of having an offset account over a redraw facility.
The ATO’s approach to the deductibility of interest is to look at the purpose for which the money was borrowed. If you take out a loan for an investment property or for shares that earn income, then the interest is deductible. However, this general rule will change when the loan is paid down, and then the money is borrowed back out of the loan for a new purpose. If the additional borrowing back out of the loan is not used for a deductible purpose e.g. bat, holiday, new car, etc. then not all of the interest will be deductible because it is no longer the case that all of the borrowed money was used for a deductible purpose.
Having an offset account is a different situation. When you pull money out of an offset account, the original loan amount has not changed, and therefore the deductibility of the interest on that loan will not change either. The offset is a transaction account, so when you draw money out of the offset account it is not coming out of the loan account, so the purpose of the loan hasn’t changed.
You purchase an investment property for $500,000 and borrow $500,000 interest only. Over the course of 5 years, you make additional repayments of $50,000 so that the loan balance is now $450,000. You decide to redraw the $50,000 equity and buy a boat. The loan now is only 90% deductible and 10% non-deductible, as $50,000 of the loan balance was used for a non-deductible purpose.
You purchase an investment property for $500,000 and borrow $500,000 interest only. Over the course of 5 years, you save 50,000 in an offset account. The actual balance of the loan is still $500,000, however, the net balance of the loan for interest calculation is $450,000 ($500,000 -$50,000). You decide to redraw the $50,000 equity and buy a boat.
The interest on the $500,000 loan is still 100% deductible as that money has only been used to purchase the investment property. The cash used from the offset to buy the boat has not changed the purpose of the loan at all and therefore doesn’t affect the deductibility of the loan account.
From the above examples, you can see that having an offset account gives you a distinct advantage when it’s linked to your investment loan. There is an advantage in having an offset account against your owner-occupier home loan as well if you intend to upgrade to a new home and convert the existing one to an investment loan sometime in the future as it will allow you to reduce the interest applicable on your loan without reducing the balance while it’s classed as owner-occupier loan.
When it comes to getting value out of your loan structure and ensuring that you are awarded quality direction, an experienced lender is irreplaceable. And if you are paying to use your redraw facility or an offset account fee with your bank, I suggest moving to one that gives you better value.
If you are interested in buying a home and not sure where to find the Best Home Loan Rates?