When it comes to making the most out of your mortgage, are you better off with an offset account or redraw facility? We look at the pro's and con's of both options.
Offset accounts and redraw facilities are both home loan features that allow you to use extra income or savings to reduce the balance of your loan, and thereby reduce the amount of mortgage interest you’ll pay.
There are similarities between the two, but they operate in different ways, explains Linda Clucas, Smartline personal mortgage advisor.
The offset advantage
“An offset account is a savings or transaction account that is run in conjunction with your loan account,” Clucas explains.
“Offset accounts operate as regular transaction accounts, giving you ready access to your funds.”
The benefit of an offset account is that any interest earned on the account is automatically deposited into your home loan account, thereby reducing the balance of your loan – which consequently reduces yours interest payments.
“One hundred percent offset accounts are the most attractive option, as these accounts earn interest equal to the interest you‘re paying on your home loan,” Clucas says.
“The interest that you‘re earning on your savings is then offset against the interest you‘re paying on your loan.”
For example, if you have a mortgage of $200,000 at an interest rate of 7.5%, your monthly interest repayment will be $1,250.
If you have $20,000 in a 100% offset account, that $20,000 will earn interest at 7.5%, or $125. That amount is offset against your mortgage payment, meaning your mortgage interest repayment is reduced to $1,125.
The redraw way
“Redraw facilities enable you to deposit any spare income you have directly into your home loan account,” Clucas explains.
This has the effect of reducing your outstanding loan balance, and therefore the amount of interest payable.
“You can then redraw from the loan any funds that are in excess of your regular repayments.”
In the above example with a $200,000 loan, you would deposit the $20,000 into the loan account, thereby reducing the balance to $180,000. Interest will only be charged on the outstanding balance of $180,000, and you have the ability to “redraw” any excess funds from your mortgage.
Offset vs Redraw
In terms of interest savings, a redraw facility has much the same effect as a 100% offset account.
So, if a 100% offset account and a redraw facility have the same outcome in terms of savings, what are the advantages of one over the other?
“Because offset accounts are essentially savings accounts and operate as such, you‘ll have easy access to your funds. Most come with an ATM, EFTPOS and cheque access, and some offer phone banking and some even have a credit card,” Clucas says.
“Ideally, you can arrange to have all of your salary paid directly into the offset account, which ensures that any income not spent is being used to reduce the balance of your loan. So, while you’re receiving the interest savings, you also have peace of mind in knowing that you can access your funds at any time.”
Redraws, on the other hand, often have restrictions. Some institutions will limit you to as few as two redraws per year, while others have a minimum redraw amount of $1-2,000.
“Others will charge you up to $50 per withdrawal,” Clucas warns.
“Be sure to find out exactly how the loan‘s redraw facility operates before you sign up, because they‘re not all the same. A 100% offset account will be a more attractive option than a restrictive or expensive redraw facility if you‘re intending to use the account for
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