November 02, 2016
It’s no surprise that we at Mortgage Choice are 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 of conversation. Our article should clear up some confusion and explain the difference in 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 a bonus cheque from their respective workplaces, which totals $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), and 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 The idea behind this facility is that those additional funds payed off the loan can be accessed and withdrawn at a later date, if need be.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 bring benefits to 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 suited feature for you. This will allow you to access your funds without paying any extra off the principle 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 your mortgage broker.
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. You can try one of our home loan calculators here.
Even better, why not contact Steve today on 6144 3230 or 0433 124 081 to arrange a meeting to discuss getting the right home loan with the best features for you.