Explainer: how redraw and offset accounts can save you money

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Offset accounts and redraw facilities work in similar ways; they both allow you to reduce the balance of your home loan, and therefore the interest charged by applying extra money to your debt.  You might be making extra repayments to shorten your loan as described here http://keyfinance.com.au/extra-home-loan-repayments/ . So what’s the difference?

Redraw facilities allow you to deposit spare income into your home loan account, allowing you to redraw a sum equal to the extra repayment amounts in future.

In the meantime, the extra money paid will lower the amount of interest charged while still giving you access to your money.

However, there may be restrictions on how much money can be withdrawn and when.

“For redraw, it depends on whether the facility applies to a fixed-rate or variable loan,” Moses says. “Most institutions only allow redraw from a variable-rate loan, or fixed-rate loan but with limited access.”

It is important to find out how a loan’s redraw facility works before taking it on, as the fees and restriction attached might outweigh the benefits of interest savings. (http://keyfinance.com.au/avoid-home-loan-fees/)

Deciding between an offset account and a redraw facility on your home loan largely depends on how accessible you need your extra money to be.

Offset accounts are like savings accounts that function alongside your home loan however instead of earning interest (that may be then taxed), you ‘save’ interest payable on your home loan.

Let’s say you have $10,000 in your 100 per cent offset account. Instead of paying interest on your $150,000 loan, you are only paying interest on $140,000.

Offset accounts quite often come with a ‘full package home loan’ that may have an annual package fee.  This fee may be worth the interest savings and the added flexibility compared to redraw facilities however you need to sit down with your mortgage broker and discuss how you bank to determine if it’s of benefit.

There are less restrictions attached to 100 per cent offset accounts as opposed to redraw facilities.  Offset accounts are very flexible. But really, it does just depends on each lender.

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