While borrowers can’t predict a global pandemic and the toll it may have on their lives, there are actions you can take that can help you weather the storm.
One way you can prepare when it comes to your home loan, is by making extra payments directly to your loan or via an offset account. Not only is this a great way to pay down your loan earlier, and provide access to a cash buffer or rainy day fund when you need it, it can also give you peace of mind in uncertain times.
Here we explore the differences between the use of an offset account and making additional payments to your loan which are available in redraw.
What is an offset account?
An offset account is a separate transaction account linked to your home loan. The money you deposit into your offset account offsets the interest you pay on your home loan, which means the more money you deposit into your offset account, the less interest you’ll pay on your home loan.
For example, if you have $10,000 in your offset account and your loan balance is $300,000, you will only pay interest on $290,000.
Generally speaking, offset accounts are only available with a variable rate home loan however there are some fixed rate home loan options with offset accounts available. Most fixed rate loans only allow partial interest offsets meaning only a percentage of the amount held in your offset account reduces your interest or the benefit is limited to a percentage of the interest rate.
You may be able to have more than one offset account associated with your home loan.
Offset accounts may also have a linked debit card, which allows you to access the funds in the account. If you are interested in an offset it is important you understand how it works so that you not only get the right type of offset but are able to make the most of it.
How can I maximise my offset account?
One simple way you can make the most of your offset account is by having your salary deposited into the account each pay cycle. You may also want to keep your savings and any other funds in the account because the more you deposit into your offset, the less interest you’ll be charged on your home loan.
What is a redraw facility?
A redraw facility allows you to access extra repayments you have made to your home loan. If you make additional home loan repayments above what you are contractually obligated to pay, you will have what your lender may refer to as an ‘available balance’, or a ‘redraw balance’, which you can access for other expenses.
One of the key differences between an offset account and a redraw facility is that unlike an offset account, it can be slightly harder to access the money in your redraw. That’s not necessarily a bad thing though as it can prevent you from easily accessing money you wish to save. Shopaholics we’re looking at you!
The other thing to consider is that your lender may specify a minimum amount you can redraw and the additional repayments you make belong to the lender, unlike an offset account where the money is considered your savings.
Much like an offset account, redraw facilities are generally only available to borrowers on a variable rate home loan.
If you are looking to refinance and would like a redraw facility or an offset account It’s important that you speak to your broker to find out if either of these options are available to you.
Which option is better?
There is no single answer for every borrower, it will depend on each borrower’s individual needs.
That being said, the devil is in the detail and it’s important you discuss with your Mortgage Choice broker how each option would work for you.