Offset accounts and redraw facilities are standard home loan features. They allow you to use extra income or savings to reduce the amount of your loan on which you will be charged interest. They can help save thousands of dollars over the life of your loan.
Let’s break this down.
Both offset accounts and redraw facilities:
- help you reduce the amount of interest you pay on your loan.
- help you pay off your loan quicker.
- are typically available on most standard variable-rate loans.
As a borrower, you need to take note that these loan features come with costs and restrictions.
What is an offset account?
An offset account is a transaction account that is linked to your home loan, but it functions as a regular everyday account, allowing you to withdraw money from ATMs and buy things using a debit card.
For instance, if you have a $500,000 home loan with a 2.8% interest rate and an offset account with a $50,000 balance, your mortgage rate will be charged on only $450,000 of your home loan. Some products offer only a partial offset.
You can have your employer deposit your salary into the offset account and you can transfer money in from other accounts.
Benefits:
- It works like a high-interest savings account linked to your loan.
- The more funds you have in the offset account, the less interest you pay on the mortgage.
- Over the life of the loan, saved interest can go towards the principal of the loan instead, thus helping you pay off the loan quicker.
- You can have salaries paid into your offset account and use it to build the emergency fund – this way, your account is always loaded.
- You have the accessibility of a regular transaction account, allowing for instant access of funds without restriction.
- You won’t need to pay withdrawal fees.
- You can keep your mortgage open, even if you have money in your offset account that can fully pay off the remaining loan balance.
- Possibility of tax benefits, as the money in an offset account isn’t considered taxable income since it doesn’t earn any interest.
Drawbacks:
- Not every offset account is 100% – some offset your loan by only 80% of the funds.
- Home loans with offset accounts typically have marginally higher interest rates than basic home loans that don’t come with them.
- Not all home loans offer an offset account, and your lender may charge you for adding the feature.
- You may need to maintain a sizable balance in the account to reap the benefits.
What is a redraw facility?
A redraw facility is a feature in home loans that allows you to withdraw extra repayments that you have paid on your home loan. These extra repayments are amassed separately and are available for withdrawal.
Suppose your minimum monthly mortgage repayments are $1500, and in one month you repay $3000, you could withdraw the extra $1,500 at a time of your choosing if necessary.
These funds are available as per your need but you could use them for important things like paying down debt or doing home renovations.
Benefits:
- A redraw facility will help you pay off your loan faster if you keep the funds untouched in the account.
- You can also make a lump-sum repayment towards your loan when you use your redraw facility.
- The funds in your redraw will reduce the principal ahead of your regular repayment schedule.
- Making extra repayments can decrease the length of your loan and how much interest you pay.
- The ability to redraw money can be beneficial in emergencies.
- Most low-rate home loans offer redraw facilities.
- Some lenders provide unlimited free redraws.
- Money stored in a redraw facility isn’t taxed.
Drawbacks:
- Some lenders charge a fee for withdrawals. If you don’t use your redraw facility, you could be at a loss paying the fees to maintain it.
- Lenders may limit withdrawal amounts.
- The funds in the redraw facility are not easily accessible; there can be a delay in requesting and receiving the funds.
- Not typically available on fixed-rate loans or interest-only loans.
- Redraw accounts have fewer tax benefits for property investors than offset accounts.
- Note that once you withdraw those extra funds from your redraw facility, you lose the interest benefits that money was giving you.
Offset account Vs redraw facility: Which one is right for me?
If you have a mortgage, you could benefit from either feature (or both of them). However, one or the other may be better suited to your scenario and mortgage.
For example, you can consider which of the following goals is more important to you:
- Suppose your goal is to reduce the interest payable on your home loan while retaining day-to-day access to your cash. In that case, a mortgage offset account is the best for you as it offsets the interest you owe on your account. If you want to redraw the accumulated funds at a later date, best to use offset, as you’ll have greater control over those funds.
- Suppose you want to use the additional funds to pay off your loan, then it is best for you to use a redraw facility, as it enables you to reduce the total balance of your home loan instead of just reducing how much interest you have to pay in the short term.
Both offset accounts and redraw facilities allow you to use extra funds to reduce the amount of interest you pay. This means that if you are a diligent saver, you will benefit the most from these features.
Can I use both offset and redraw?
Yes, you can. Many people choose to use both offset accounts and redraw facilities. For instance, you might consider making an extra repayment into your home loan each month while also using an offset account as your transaction account and having your salary deposited there.
Both your offset account and redraw facility will help reduce the amount of interest you pay on your home loan. They could also help you pay it off earlier.
Taking full advantage of offset and redraw
These two features add ease to your home-loan journey, you need to make sure that you use them to their highest potential. Here’s how.
Suppose you get paid on the first of every month. In that case, do not wait until the 15th to put your surplus funds into the offset account – or the loan account if you have a redraw. It may not make a difference with one paycheque, but every tiny bit counts over the life of the loan. It can add up.
If you are a professional investor with more complex needs, there are many other factors to consider.
If you want a fixed product, which does not generally come with either offset or redraw facility, you can opt to split your loan into fixed and variable portions. Then, link the offset and the redraw facility to the variable portion. In this case, it’s best to have a loan amount higher than the offset or redraw balance to fully utilise both features.
Take this example. If you have $50,000 in offset and the variable loan portion is around $60,000, the $50,000 offset balance is fully utilised to reduce interest. In contrast, if your variable loan portion is $45,000, the additional $5000 in offset/redraw is not providing you any interest savings.
It’s best to withdraw funds through a redraw facility via internet banking (that’s usually free).
Apply for a home loan
A range of factors determines the best way to weigh your finances and home loan needs.
Home loans’ features vary, so when selecting a home loan, you should speak with one of our expert mortgage brokers to get the one that best suits your circumstances.
Our specialist mortgage brokers can help you determine the right option for your needs after a full assessment.
Please give us a call on 1300 889 743 or complete our free assessment form today to discuss your needs.
