November 02, 2016
It’s no surprise that our mortgage broker Steve Sims is frequently asked to explain the difference between an offset account and a redraw facility. For those who don’t work in the finance industry, it can be a really confusing topic. This blog post should clear up some confusion and explain the difference in easy to understand layman’s terms.
An offset account can be described as an account that links to your home loan which is an everyday transaction account. The balance that is held in this account will offset the balance in the home loan, which helps to reduce the overall term of the loan as well as the interest due on the loan.
Let’s take a look at an example in order to explore offset accounts further:
Jeff and his partner Ivy owe $400,000 on their home loan.
They both recently received bonuses from their workplaces, which total $15,000. They decide to put the full amount into their offset account in order to reduce the interest charged on their loan. This means that the entire time there is $15,000 in their offset account, they will only pay interest on $385,000 (that is $400,000 - $15,000), rather than the original amount they borrowed.
These loans are most common within “package loans”, which may also include annual fees and compulsory credit cards.
A redraw facility is a home loan feature which enables additional payments to be made directly into the loan. The idea behind this facility is that those additional funds paid off the loan can be accessed and withdrawn at a later date if need be.
However, with some loans, a fee may be associated with redrawing money from the home loan. These loans are usually referred to as “basic loans”, with no annual fees or compulsory credit cards.
Offset VS Redraw
Both types of loan features help customers to minimise the costs of a home loan. One feature may be better suited to your loan than the other.
If you are looking to maintain day-to-day access to your cash whilst also reducing the interest on your loan, a mortgage offset account may be the best option for you. This will allow you to access your funds without paying any extra off the principal value (original amount borrowed). The amount that will offset can vary. Each lender will have differing criteria for their offset accounts, so it is advisable to do your research and speak with an experienced mortgage broker like Steve Sims.
With many lenders, any loan that has an offset facility may attract a slightly higher rate than a basic loan that offers only a redraw option. If you’re not a great saver, then you may need to consider which loan is best suited to your needs. Why opt for a loan with a higher rate simply to get a facility that you may never use?
Either way, irrespective of which facility you use, the more you can pay towards your mortgage, the better off you’ll be. Have a look at our home loan calculators here to work out what you can acheive by paying just a little bit more.
To get expert home loan advice at no cost to you, call Steve Sims from Mortgage Choice in West Perth on 0433 124 081 or firstname.lastname@example.org today!
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