Offset vs. Redraw: Understanding the Impact on Retirement and Centrelink Payments

Offset vs Redraw Key Differences

Navigating the financial complexities of retirement is a challenge faced by many Australians. For retirees who still hold a mortgage, the choice between offset accounts and redraw facilities can have significant implications for their Age Pension, Disability Support Pension (DSP), or JobSeeker eligibility. While both options help reduce interest costs, understanding how they interact with Centrelink assessments is crucial.

Offset Accounts and Redraw Facilities: Key Differences

Both offset accounts and redraw facilities allow borrowers to save on interest charges while maintaining access to their funds. However, their treatment under Centrelink’s rules can differ dramatically:

Redraw Facility

  • Definition: A redraw facility allows you to access funds you’ve paid in advance of your standard mortgage repayments, subject to lender terms.
  • Centrelink Impact: The balance in a redraw facility is not counted as a financial asset.
  • Example: A mortgage with $50,000 in redraw will not affect Age Pension, DSP, or JobSeeker eligibility.

Offset Account

  • Definition: An offset account is a separate account linked to your mortgage, where deposited funds reduce the interest charged on your loan. These funds can be withdrawn anytime.
  • Centrelink Impact: The balance in an offset account is considered a financial asset for Age Pension and DSP eligibility.
  • JobSeeker Consideration: Centrelink treats the balance as a liquid asset, potentially extending the waiting period for JobSeeker payments by up to 13 weeks.

The Financial Impact of Offset Accounts

A common scenario involves retirees with a mortgage balance matched by an equal offset account balance. While this setup eliminates interest costs, Centrelink includes the offset account balance in both the assets and income tests.

Example:

  • A retiree has a $50,000 mortgage and $50,000 in an offset account.
  • The interest cost is eliminated, but the $50,000 offset is counted as a financial asset.
  • For part Age Pensioners, this can reduce payments by up to $3,900 per year or $150 per fortnight.

Strategies for Retirees

To avoid the unintended financial consequences of offset accounts, retirees can consider the following options:

  1. Repay the Loan with the Offset Balance
    • By repaying the mortgage, you eliminate both the debt and the offset account balance, which removes the asset from Centrelink calculations.
  2. Switch to a Redraw Facility
    • If retaining the mortgage facility is important, transferring funds to a redraw facility (if permitted by your lender) ensures the balance is excluded from Centrelink’s financial assessments.

The Growing Trend of Retiring with Debt

The financial landscape for retirees is shifting. According to the Australian Bureau of Statistics (ABS):

  • In 2000, 64% of Australians aged 55–64 owned their homes outright.
  • By 2020, this figure had dropped to 36%.

This trend highlights the increasing prevalence of retirees entering retirement with outstanding home loans. Factors such as rising property prices, longer mortgage terms, and economic pressures contribute to this change.

Planning for the Future

Many clients in their final working years plan to use their superannuation savings to clear mortgage debt at retirement. While this can simplify finances, professional advice is essential to ensure the strategy aligns with long-term goals and Centrelink requirements.

Final Thoughts

Offset accounts and redraw facilities offer valuable financial tools for retirees with mortgages, but their impact on Age Pension, DSP, or JobSeeker payments cannot be overlooked. Understanding the rules and seeking expert guidance can help retirees make informed decisions that maximize their financial security in retirement.

If you’re nearing retirement and have questions about your mortgage setup, reach out to a financial planner to explore the best options for your unique circumstances.

Shaun Jones MAppFin (FP) 

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