Offset account vs Redraw facility
An offset account and redraw facility are two features of a home loan that can allow you to use your income or extra money to help reduce the balance of your mortgage and potentially reduce your interest payments over the life of the loan. If you would like to save paying interest on your loan(s), using one of these accounts could be a smart choice. There are, however, some key difference between these two products that must be considered:
What is a Redraw Facility
A redraw facility allows you to deposit any extra money you may have directly into your mortgage to reduce the loan balance. You can then redraw any excess money that you have placed into your home loan account.
For example: If you have a mortgage at 5% with $300,000 owing on it and deposit $20,000 into the account as redraw. Effectively you would now be paying 5% interest on $280,000 and can withdraw the $20,000 you have deposited to use in case of emergency or for new purchases.
What is an Offset Account
An offset account is an everyday transaction or savings account that is linked to your home loan account. Offset accounts operate as a regular transaction account allowing you to deposit or withdraw money anytime, many even come with an ATM card and the option for a credit card. The money that you deposit into this offset account is then ‘offset’ against your loan balance just like a redraw facility. Hence the interest on your mortgage is then calculated on the remaining.
Just like the above example if your home loan has $200,000 owing on it and you have $10,000 in your offset account, you will only be paying interest on the $190,000 remaining balance. Most lenders offer 100% offset accounts, so the entire sum in the account is ‘offset’ against your loan balance.
Redraw vs Offset
Offset accounts are essentially savings accounts allowing ATM, EFTPOS, cheque access and some even have credit card options. Ideally, you could have your salary paid into your offset account ensuring that any funds not spend will reduce your interest payments on your home loan.
Redraw facilities are usually not as flexible as offset accounts, there may be a minimum amount for redrawing and a longer wait time for the funds to transfer depending on the lender. Some lenders may even charge fees after a certain number of redraws. These drawbacks could be seen as positive in deterring you from accessing your excess funds and reducing your interest payments.
For offset accounts some lenders may charge higher rates or may only offer a partial offset account, not a 100% offset account. Depending on your situation and goals it may be necessary to speak with an Accountant or Financial Planner.
Contact us at Loanbrite for further information and help you compare home loan products, fees and charges that apply to home loan products.