How redraw and offset accounts can save you
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 However, there may be restrictions on how much money can be withdrawn and when.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 facilities, it depends on whether the facility applies to a fixed-rate or variable rate loan. Most lending institutions will only allow redraw from a variable-rate home loan facilities.
It is very 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. An offset account is a fully functioning transactional account which offsets against the interest on your home loan. Generally speaking, most lenders will only allow an offset account to offset against a variable rate loan, however if you would like fixed, you can “split” your home loan and have a variable portion which you can offset.
The benefits of an offset account include the following:
Better access to your funds, whilst still keeping the benefit of saving interest on your home loan
You save interest, rather than earn interest, which means there isn’t income tax to pay
Your income can be paid directly into the offset account, meaning you save interest immediately when the funds are deposited
You will receive a debit card linked to your offset account, you can use this facility to pay everyday living expenses.
Let’s say you have $10,000 in your 100 per cent offset account. Instead of paying interest on your $100,000 loan, you are only paying interest on $90,000 - it’s a great product feature to have.
Offset accounts, like many savings accounts, often come with account fees, but the fee may be worth the interest savings and the added flexibility compared to redraw facilities.
There are less restrictions attached to 100 per cent offset accounts, they’re very flexible for home loan borrowers. However, it does depend on each lenders policy - consult with your Mortgage Broker to find out what loan structure is most suitable for your unique circumstances.
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