RDP 2021-10: The Rise in Household Liquidity 2. Institutional Features of the Australian Mortgage Market

Mortgage offset accounts and redraw facilities are features of the Australian mortgage market that are unusual by international standards. These accounts increase the liquidity of housing wealth and makes it easier for households to save through mortgage prepayment.

Mortgages with offset accounts currently comprise around 40 per cent of mortgages in Australia. An offset account is an at-call deposit account that is directly linked to the mortgage loan. Funds deposited into an offset account reduce the effective outstanding loan balance and therefore the interest payable on the loan. Mortgages with redraw facilities make up around 70 per cent of the total number of home mortgages in Australia.^[3] A redraw facility enables the borrower to withdraw excess funds they have already contributed to pay off their loan. The balance of the facility consists of any extra payments the borrower has previously made towards paying their loan, above the amount required by the loan contract.

These mortgage products are a tax-effective method of saving. First, the effective deposit rate is the mortgage interest rate because the borrower ‘saves’ on interest payments by holding money in an offset account. Second, the account generates no tax compared to depositing money into a separate savings account where any interest accruing adds to taxable income. This means there can be large tax advantages for borrowers to pay off owner-occupied properties while still retaining access to the funds (mortgage interest payments are not tax deductible for owner-occupier loans, though they are for investor loans).

The main differences between offset accounts and redraw facilities are the degree of liquidity and the effect of withdrawals on home equity. In terms of liquidity, the funds sitting in an offset account are at call and easily accessible for withdrawal and for purchasing goods and services. The money in a redraw facility, while accessible, is not available for same-day, at-call withdrawal. The redraw has to be transferred to a deposit account before being spent. There may also be fees associated with redrawing money from the loan and limits on how often the redraw facility is used. Also, a withdrawal from an offset account does not affect the principal balance of the loan, whereas a redraw increases the principal and hence reduces the equity in the home. In other words, offset accounts are a type of deposit account linked to a home loan and the balances in offset accounts do not reduce the mortgage principal outstanding, but balances in redraw accounts do reduce credit outstanding.^[4]

Footnotes

Some mortgages have both an offset and redraw facilityso these proportions are overlapping andsum to more than 100 per cent. [3]

Another difference is the tax treatment of redraw accounts for investors compared to owner-occupiers. Investors with redrawaccounts cannot claim tax deductions on any withdrawn funds. [4]