Redraw and offset accounts. The difference and benefits
Redraw and offset accounts 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.
What is an offset account?
An offset account is a transaction account that is linked to a mortgage account. Essentially, reducing interest payable as interest is only charged on the net balance, i.e. mortgage balance less your offset account balance.
What is a redraw facility?
A redraw facility gives you access to any extra money you have deposited into your home loan directly.
How redraw and offset accounts can save money?
Redraw facilities allow borrowers to deposit spare income into their home loan account. Effectively allowing them to redraw a sum equal to the extra repayment amounts. Generally, you will have to transfer these funds into a linked transaction account before you could access funds.
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However, there may be restrictions on how much money can be withdrawn and when.
Depending on whether the facility applies to a fixed-rate or variable loan most lenders 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. The fees and restriction attached might outweigh the benefits of interest savings.
Deciding between redraw and offset account 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 which is much more convenient than the redraw facility.
With 100 per cent offset accounts, you earn interest equal to the interest you are paying on your loan. Rather than earning savings account rates, you are earning home loan account interest rates on the money held within the offset account.
How does an offset account work?
Let’s say you have $50,000 in your 100 per cent offset account and a loan balance of $300,000. Instead of paying interest on $300,000 loan, you are only paying interest on $250,000. Saving money since borrowers are not paying any interest on money that’s in the 100% offset account.
Like many savings accounts, offset accounts often come with account fees, but the fee may be worth the interest savings and the added flexibility compared to redraw facilities. If not monthly, the lender’s package fee would cover the offset facility fee. Another important factor is that many lenders would allow you to have multiple offset accounts linked to one loan. This helps those borrowers who like to organise different accounts for different purposes.
Everyone has a unique set of personal financial circumstances and priorities. With access to a wide variety of lenders, I am always happy to discuss which loan package is most suitable for you either in person, over the phone 0410 971 981 or via email firstname.lastname@example.org