The PPOR Redraw Problem

The PPOR Redraw Problem


The Editor is also the Founder of The Passive Investor website. He is a part-time practising General Practitioner (GP) with an interest in all financial and investment-related topics. He is particularly focused on the integrated use of residential property, commercial property and the sharemarket to develop effective financial strategies for wealth accumulation and distribution.

Latest posts by Editor (see all)

When getting a home loan for a principal place of residence (PPOR), you will usually have the option of putting repayments of the principal loan amount (and any extra cash savings on top of this) either into a redraw account attached to the home loan or into a 100% home loan offset account.

In both cases, the cash that goes into either the redraw account or offset account reduces the effective interest incurred on the original loan balance.

For example, for a $700,000 property with a $500,000 loan balance, having $200,000 cash in a redraw account will result in you incurring interest on a $300,000 loan balance (ie. $500,000 – $200,000).

In the case of using an offset account, the loan balance would still be shown as $500,000, but with $200,000 cash shown in an attached offset account that effectively “offsets” the original loan balance such that the interest incurred will also be calculated on $300,000 (ie. $500,000 – $200,000).

So far there is no problem as the outcome is exactly the same whether you are using a redraw account or offset account.

However, the problem arises if/when you decide to convert your PPOR into an investment property, and purchase a new PPOR.

If you were using an offset account, you could withdraw the $200,000 sitting in the offset account to help pay for the new PPOR, and the original PPOR loan balance would stay at the original $500,000 amount and be fully tax-deductible if the original PPOR is converted into an investment property.

If you were using a redraw account, and you withdrew the $200,000 sitting in the redraw account to help pay for the new PPOR, this withdrawal is considered a re-borrowing – which is a very important difference.

In this situation if the original PPOR is converted into an investment property, of the original loan balance of $500,000, $200,000 will be considered non-deductible (as it is being used to purchase a new PPOR) and only the remaining $300,000 will be tax-deductible.

So buy putting principal repayments and extra cash savings into a redraw account rather than an offset account in this situation, you will lose the tax benefits of incurring tax-deductible interest on this extra $200,000 amount when your original PPOR becomes an investment property and you purchase a new PPOR with those funds.

Because of this, we generally prefer to use offset accounts over redraw accounts for PPOR home loans.

Subscribe and never miss a post!

Leave a Reply

Your email address will not be published.


You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>