March 06, 2015
When taking out a home loan, you may be asked whether or not you would like an offset account attached to your loan or a redraw facility.
To answer this question and pick the right feature for your needs, you must first know what each facility is and how they work.
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.
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few as two redraws a year, while others may charge a fee per withdrawal or require that a certain ‘minimum’ amount be withdrawn every time.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.
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.
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 more information contact Richard Windeyer on 1800 01LOAN.