Offset accounts and redraw facilities work in similar ways; they both allow you to reduce the balance of your home loan, and therefore the interest charged, by applying extra money to your debt.
Redraw facilities allow you to deposit spare income into your home loan account, allowing you to redraw a sum equal to the extra repayment amounts in future.
In the meantime, the extra money paid will lower the amount of interest charged while still giving you access to your money.
However, there may be restrictions on how much money can be withdrawn and when.
For redraw, it depends on whether the facility applies to a fixed-rate or variable loan. Most institutions only allow redraw from a variable-rate loan, or fixed-rate loan but with limited access.
It is important to find out how a loan’s redraw facility works before taking it on, as the fees and restriction attached might outweigh the benefits of interest savings.
Deciding between an offset account and a redraw facility on your home loan largely depends on how accessible you need your extra money to be.
Offset accounts are like savings accounts that function alongside your home loan. You earn interest on the money in the offset account and you often have a debit card attached for simple withdrawals.
Mortgage Masters Managing Director – Tracy Parish Explains.
“Offset accounts work really well when two main factors are in play for our clients – they have money left over from their purchase, like to save for a special event and love seeing a big bank balance when they go to bed at night.”
Instead of putting their savings in an online account or term deposit where they might earn 2%p.a. if they are lucky and paying tax on the earnings they place them in an offset account. Let’s look at this example;
Clients have a mortgage of $300,000 and an offset account balance of $15,000.
Every night when the lender calculates the interest on the mortgage they use the balance of $285,000, instead of the actual balance of $300,000. If the rate on their mortgage is say 5%p.a. then the $15,000 has just saved them $2.05 on their daily interest charge for the mortgage – it might not sound like much but it’s $750 a year or $3,750 over 5 years.
On the other hand some clients love spending and really struggle to build a bank balance so in this situation a redraw facility with a mortgage works better. “After a careful review of our client’s budget we establish a higher repayment on their mortgage which does a couple of things – firstly, it puts them in front and comfortable in the event of any future rate rises. Secondly, it creates the savings mechanism for that special occasion so they can access the funds down the track.”
“There are less restrictions attached to 100 per cent offset accounts, they’re very flexible. But really, it does just depend on each lender,” Tracy says.
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