Redraw or offset: what is right for you?

March 03, 2015
David Thomas

 If you are looking for a home loan, one question you may have to answer is whether you would like a redraw facility attached to your loan or an offset account.

 

For those who don’t know how one home loan feature differs from the next, choosing between the two can be tough.

 

Unfortunately, there is no right or wrong answer when it comes to choosing between an offset account and a redraw facility, it all comes down to personal preference and which option is best suited to your unique needs.

 

In order to determine which loan feature will best suit your individual needs, it pays to know a little bit about both loan features and how they may help or hinder your current and future financial goals.

 

What are they?


In a nutshell, offset accounts and redraw facilities are two home loan features that use any extra income or savings to reduce the balance of your loan, in turn reducing your interest repayments - which can help you to save thousands of dollars over the life of your loan.

 

But while there are similarities between the two, they do operate in different ways.

 

Offset accounts


An offset account is usually a transactional account, which is linked to your home loan. The balance held in this account "offsets" the balance in the mortgage, helping you to reduce the interest paid and overall term of the loan.

Many lenders offer a 100% offset account as a feature with standard variable home loans. Regular repayments are made to the loan as required, and a separate transaction account is set up with the same financial institution. You can deposit your income into this transaction account and use it for day-to-day expenses.

 

Some of the key benefits associated with an offset account, include:

 

  • Flexibility:  A typical offset account is essentially an everyday transactional account, so it's very easy to deposit and withdraw your funds.
  • High interest return: Interest rates charged on home loans are usually higher than interest rates paid on everyday transactional accounts. So while you don't receive interest on your savings in the offset account, the interest that you save on your home loan will typically outweigh potential interest gains.
  • Daily gains: With an offset account, interest is calculated daily, so whether you save regularly or live paycheck to paycheck, as soon as there are some savings in your offset account for more than one day at any point in time, you will benefit from the offset effect on your home loan.


Redraw facilities


Borrowers with a redraw facility attached to their mortgage are given the opportunity to make extra repayments to their home loan – which helps to reduce their interest repayments.

 

They are also able to “redraw” the extra funds they have paid into their mortgage if a need arises in the future.

 

One of the main benefits of a redraw facility is the fact that it “forces” you to save.

 

Different lenders will have different rules when it comes to redraw facilities. Some lenders will limit you to as few as two redraws a year, while others may charge a fee per withdrawal or require that a certain ‘minimum’ amount be withdrawn every time. While this doesn’t sound particularly flexible, the good part is it forces you to leave any extra funds you have pumped into your mortgage alone as the fees and minimum withdrawal rules act as a deterrent to withdrawing money altogether.

 

Regardless of whether you opt for a redraw facility or an offset account, it pays to do your research and make sure the option you choose suits your current and future needs.

 

As your local Mortgage Choice mortgage broker I can step you through the entire home loan process and ensure your loan boasts the right features for your needs.

 

For further information, and to put yourself in the best position with valuable information and guidance, contact a trusted consultant from Mortgage Choice on 07 3286 7711.   


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