May 31, 2017
In today’s rapidly changing world, it is always good to get advice and get educated on financial matters, so that you can put yourself in the best position when making financial decisions.
So, let’s focus in on some features that are common to most home loans. I want to discuss the differences between redraw and an offset account. What are the advantages and disadvantages of both and when would you choose one product over the other.
Well let’s first recap what an offset account is, after my first blog.
Well simply put, an offset account is like an everyday transaction account or savings account, however, it has the added bonus of being linked to your home loan account. Why is this good you may ask? Well, the money that you have saved in your offset account, actually offsets the amount of interest you pay on your home loan.
Let me explain further with a real-life example. Let’s say that you have borrowed $400,000 and you have that sitting in a home loan account, but you have an offset account linked to that home loan account with $100,000 in savings sitting in there. What this means is that instead of paying interest on $400,000 that you have borrowed, you now minus the $100,000 (as it offsets the home loan amount), so that you only pay interest on $300,000. This means that at today’s interests rates of roughly 4%, you would save $4000 per year.
Reduces the balance of the loan, hence, reduces interest payable on your loan daily
Good for everyday transactions
Multiple offsets – good for budgeting/ investors that want to have payment for each property compartmentalised. Good for investors with a buffer
No Tax on money saved
Salary crediting (Salary paid directly into the offset account, like you would a savings account)
Usually a package fee of $395 / year
Usually a slight higher interest rate
Now redraw is similar to an offset but instead of being attached to the home loan it actually takes place inside the home loan account. So redraw inside of the home loan account doesn’t really act like a transactional account with lots of ingoings and outgoings. If you wanted to redraw it was a bit clunky in the sense you had to transfer funds to another saving account to use them and then transfer funds bank into redraw if you wound to lower your home loan.
Reduces the balance of the loan, hence reduces interest payable on your loan daily
No Tax on money saved
Good for making large deposits on home loan
Lower fees/interest rate
Not good for lots of transactions
Hard to access the same day
Have to transfer across to a savings account to get access
Can’t get multiple redraw
Basically, redraw and an offset do the same thing, they lower the balance on your home loan so that your monthly repayments are lower. It just then comes down to what features you personally need in a loan and that is where a financial specialist can help you determining what loan product is right for you.
I hope you learnt something through this article and that these blogs are helping to build your financial literacy. Having a financial specialist look over your own personal situation is wise as they can often advise you to the right loan product for your situation. So if you need any further assistance be sure to drop in or give us a call at Blaxland or Penrith with Mortgage Choice.