You have no doubt heard words like ‘redraw facility’ and ‘offset account’ bandied around a lot. But what are they and how do they differ?
Offset accounts and redraw facilities are two home loan features that allow you to use any extra income or savings to reduce the balance of your loan and your interest repayments. There are similarities between the two, but they operate in different ways. From the outset, it is important to note that both of these features are generally only available on variable rate loans, and not fixed-rate loans.
An offset account is a separate transaction account that is linked to your home loan. All the money held in this account is then used to offset the interest charged on your home loan.
For example, say you have $10,000 in your offset account and you currently owe $500,000 on your home loan. The money in your offset account ensures you only pay interest on your mortgage minus the money in your offset account. In other words, you will be charged interest on a $490,000 loan, rather than a $500,000 loan.
If you do choose to take on a home loan with an offset account, it’s imperative you know how to get the most out of this home loan feature. In the first instance, it is always a good idea to deposit your income directly into your offset account to maximise your savings. By having all of your money directly deposited into your offset account, you can increase the balance of the account, which will ensure you maximise the value of this particular home loan feature. It is important to note that interest is calculated daily. So, even if you use the offset account as your transactional/spending account, the funds in your account will always offset the interest payable on your home loan – regardless of how much is in there.
Furthermore, instead of having a separate savings account, try saving all of your money in your offset account. If you can’t trust yourself with your money and feel the need to lock your savings into a separate account, you can either use a redraw facility or, in some cases, lenders may allow you to have a second offset account.
Alternatively, a redraw facility enables you to deposit any spare income you have directly into your variable rate loan account. You can then redraw from the loan any funds that are in excess of your regular repayments. This can done via internet banking.
In terms of interest savings, a redraw facility has much the same effect as a 100% offset account. Once again look at the situation where you owe $500,000 and if you deposit $10,000 into the loan account, you have effectively reduced the loan principal to $490,000 and have $10,000 available to redraw whenever you require.
Whilst all variable rate loans have a redraw facility, not all variable rate loans include an offset facility. This is where you need to consult us.
So which one is best for you?
From a financial perspective, there is no difference between the two as they both save you an identical amount of interest on your loan. We would recommend you obtain financial advice on which better suits your individual circumstances. We can point you in the right direction.
Access – Offset accounts offer a higher degree of access as the available funds are available in a similar way to a normal transaction account, ie, ATM, EFTPOS, internet & phone banking, cheque & deposit book. Funds held in a redraw facility are generally only accessible via the internet & phone banking. Hence, you need to consider the level of access and discipline that best suits you.
Fees/costs – Whilst most redraw facilities are free, most offset accounts have a regular monthly or annual fee.
Rates – Most lenders tend to offer lower variable rates with an offset account and a regular ongoing fee.
In the end, your decision as to whether to have an offset facility or a redraw facility or both will depend on what most suits you. Please do not hesitate to talk to us for further guidance.
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