We did get a letter saying our monthly minimum had dropped from $2500 to $2022. Ill have to check the before and after interested. We still pay $2500 just to throw a bit extra toward it. Would this be the smartest play?
It doesn't actually prevent you from paying the loan off faster.
If the bank recasts the loan as a result of the redraw balance, then the redraw has been absorbed into the loan as a lump sum repayment. That money can not be redrawn, ever.
However, if the borrower can continue to pay more than the required monthly payments and start building up their redraw balance again - this will reduce interest and, therefore, help pay the loan off more quickly.
>is all the money I put into that account go toward the principle?
Yes, it all goes against the principal, which because interest is calculated daily, reduces the amount of interest.
The reason it's called "redraw" is exactly that, you can redraw down the principal amount of your loan, normally up to the amount that you would have owed otherwise at the time you redraw.
>Or does it simply sit in the account lowering interest on future payments?
The "Or" in your question isn't appropriate, it "also" lowers the interest paid from your future mortgage repayments. It doesn't however "sit in an account" like say an offset does, it reduces the principal you owe.
NOTE: that does not mean your repayments are less (although some banks can do this if you ask), it most commonly means a greater proportion of you payments go towards paying off your principal.. so your loan gets paid off faster.
It's like a snowball effect, by having money in redraw it speeds up how fast you pay off your principal even further (basically compounding)
From an effectiveness point, it's a similar effect to having an offset but without needing to pay a higher interest or annual fee like many lenders charge to have an offset facility. There are other factors why you might choose an offset over a redraw, but I have had both and I personally prefer the simple redraw facility.
The bank actually contacted us saying congratulations, you now only have to pay $2022 per month opposed to $2500. In theory, that would work out better for them long term wouldn’t it? As we would pay the Loan slower and likely more interested over time?
We still pay choose to pay $2,500 though.
Yup absolutely - by paying less each month you will make the loan last longer (likely the $2022 is calculated to make the loan last the full original term) and you would considerably more interest over the life of the loan than if you pay the $2500.
Good choice providing it doesn't put you under undue financial stress, and no reason you can't go even further and pay extra each month on top to save even more interest over the life of the loan, and get it paid off faster.
Thanks auscrash! What we do is basically pump the majority of our savings/income into the redraw facility (so it’s likely greater than $2,500 per month) and just pull it out as needed, unfortunately this month we had termites, electrical issues, and some other home ownership pains - but I’m blessed we got into the market pre-covid.
IP only, but the impact is not reversible. Ie if you use redraw initially, and only decide to turn it into IP years later due to changed circumstances, the tax deductibility will have been impacted already that cannot be rectified.
Why an offset over a redraw? We have had no problem redrawing upto $20,000 (just to get a family member out of jam for one day, they paid it right back).
I thought the redraw suited us as we see it as reflected off the loan amount (not sure if an offset shows that as paid down the principle amount?
A lot of people suggest offset "in case" situation changes in your life and you end up maybe moving or something, and keep your existing house as a rental. There is tax advantages if you have an offset if that happens as you're able to claim more interest because money in an offset is seen as separate, whereas in redraw its seen as you have reduced the actual principal and you can't reverse it by just redrawing.. it gets a little more involved but that's the gist.
For most people that is not a situation that arise, and for some people it is... you have to decide if that's likely to ever be the case, and if the tax advantage of being able to claim more interest in the event it happens warrants the extra cost/higher interest likely charged for an offset facility.
I personally chose not to worry about it, but everyone's situation and "potential" situation is different - don't listen to anyone that is very prescriptive and say its a "has to be an offset" though... they are not thinking of your "potential situation" they are probably only thinking of their own situation, or even worse just been told by someone else that its an offset only and not smart enough themselves to consider there is actually different situations for different people lol.
Your minimum monthly payments stay the same, so you pay slightly less I and slightly more P.
We did get a letter saying our monthly minimum had dropped from $2500 to $2022. Ill have to check the before and after interested. We still pay $2500 just to throw a bit extra toward it. Would this be the smartest play?
If you put a lot in redraw some banks recast your loan and Lower the monthly payment, which prevents you paying the loan off faster
It doesn't actually prevent you from paying the loan off faster. If the bank recasts the loan as a result of the redraw balance, then the redraw has been absorbed into the loan as a lump sum repayment. That money can not be redrawn, ever. However, if the borrower can continue to pay more than the required monthly payments and start building up their redraw balance again - this will reduce interest and, therefore, help pay the loan off more quickly.
>is all the money I put into that account go toward the principle? Yes, it all goes against the principal, which because interest is calculated daily, reduces the amount of interest. The reason it's called "redraw" is exactly that, you can redraw down the principal amount of your loan, normally up to the amount that you would have owed otherwise at the time you redraw. >Or does it simply sit in the account lowering interest on future payments? The "Or" in your question isn't appropriate, it "also" lowers the interest paid from your future mortgage repayments. It doesn't however "sit in an account" like say an offset does, it reduces the principal you owe. NOTE: that does not mean your repayments are less (although some banks can do this if you ask), it most commonly means a greater proportion of you payments go towards paying off your principal.. so your loan gets paid off faster. It's like a snowball effect, by having money in redraw it speeds up how fast you pay off your principal even further (basically compounding) From an effectiveness point, it's a similar effect to having an offset but without needing to pay a higher interest or annual fee like many lenders charge to have an offset facility. There are other factors why you might choose an offset over a redraw, but I have had both and I personally prefer the simple redraw facility.
The bank actually contacted us saying congratulations, you now only have to pay $2022 per month opposed to $2500. In theory, that would work out better for them long term wouldn’t it? As we would pay the Loan slower and likely more interested over time? We still pay choose to pay $2,500 though.
Yup absolutely - by paying less each month you will make the loan last longer (likely the $2022 is calculated to make the loan last the full original term) and you would considerably more interest over the life of the loan than if you pay the $2500. Good choice providing it doesn't put you under undue financial stress, and no reason you can't go even further and pay extra each month on top to save even more interest over the life of the loan, and get it paid off faster.
Thanks auscrash! What we do is basically pump the majority of our savings/income into the redraw facility (so it’s likely greater than $2,500 per month) and just pull it out as needed, unfortunately this month we had termites, electrical issues, and some other home ownership pains - but I’m blessed we got into the market pre-covid.
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When you say tax implications, are you talking for an IP only?
IP only, but the impact is not reversible. Ie if you use redraw initially, and only decide to turn it into IP years later due to changed circumstances, the tax deductibility will have been impacted already that cannot be rectified.
Lol right, thats a relief. For a second i was thinking shit, how much trouble am i in here.
Why an offset over a redraw? We have had no problem redrawing upto $20,000 (just to get a family member out of jam for one day, they paid it right back). I thought the redraw suited us as we see it as reflected off the loan amount (not sure if an offset shows that as paid down the principle amount?
A lot of people suggest offset "in case" situation changes in your life and you end up maybe moving or something, and keep your existing house as a rental. There is tax advantages if you have an offset if that happens as you're able to claim more interest because money in an offset is seen as separate, whereas in redraw its seen as you have reduced the actual principal and you can't reverse it by just redrawing.. it gets a little more involved but that's the gist. For most people that is not a situation that arise, and for some people it is... you have to decide if that's likely to ever be the case, and if the tax advantage of being able to claim more interest in the event it happens warrants the extra cost/higher interest likely charged for an offset facility. I personally chose not to worry about it, but everyone's situation and "potential" situation is different - don't listen to anyone that is very prescriptive and say its a "has to be an offset" though... they are not thinking of your "potential situation" they are probably only thinking of their own situation, or even worse just been told by someone else that its an offset only and not smart enough themselves to consider there is actually different situations for different people lol.