Understanding the various features and options available for your mortgage can be crucial in making the right financial decisions. Two popular features offered by lenders are the Offset Account and Redraw Facility. While both an Offset Account and Redraw Facility can help you save on interest and manage your home loan more efficiently, it’s important to understand the key differences between an Offset Account and Redraw Facility to determine which option aligns better with your unique financial goals.
Exploring the difference between an Offset Account and Redraw Facility is essential for optimizing your mortgage and cash flow management. The Offset Account and Redraw Facility feature distinct characteristics that can impact your ability to access funds, reduce interest payments, and achieve your long-term financial objectives. By thoroughly understanding the difference between an Offset Account and Redraw Facility, you’ll be empowered to make an informed decision on the mortgage feature that best suits your specific needs and preferences. This knowledge will prove invaluable as you navigate the complexities of your home loan and work towards achieving your homeownership
Offset Account: Maximising Your Savings
An offset account is a transaction account linked to an eligible home or investment loan. The balance in this account ‘offsets’ daily against the balance of your home loan before interest is calculated. An offset account can help you cut years off your home loan term and save money on interest.
How an offset account works:
If you have a home loan balance of $500,000 and have $10,000 in your 100% offset account, you’ll only pay interest on a home loan balance of $490,000. Because your home loan interest is calculated daily, every dollar in your offset account can save you money in interest. That means more of your repayment goes towards paying down the principal, potentially helping you to repay your home loan faster.
Advantages of an Offset Account
Flexibility:
An offset account allows you to access your funds easily and make withdrawals without incurring any penalties. This level of flexibility can be valuable during emergencies or for planned expenses.
Easy to manage
simply have your salary and any other income deposited into your account to have an immediate impact on the amount of interest you pay, as the interest on your home loan is calculated daily.
Can be more beneficial than a savings account
The interest you may earn on a savings account is less than the interest incurred on a home loan
Emergency Fund Integration:
An offset account can serve as an effective emergency fund. You can keep your savings in the offset account and still enjoy the interest savings while having a safety net readily available.
Potential Investment Opportunities:
If you have surplus funds in your offset account, you can use them to explore other investment opportunities. without affecting your mortgage benefits.
Need Help Choosing the Right Option?
Deciding between an Offset Account and Redraw Facility can be a big step toward achieving your financial goals.
Disadvantages or considerations associated with using an offset account:
Initial Set-Up Costs:
Some offset accounts might require an upfront fee or attract a premium rate compared to regular mortgage accounts. It’s important to evaluate whether the initial costs align with the potential long-term savings.
Fees and Charges:
Some offset accounts may come with additional fees or charges that can affect their overall cost-effectiveness. These fees might include account maintenance fees, annual fees, or transaction fees. It’s important to review the fee structure and compare it with potential interest savings to ensure that the account remains beneficial.
Limited Availability:
Not all mortgage lenders offer offset accounts, which means you might have limited options when choosing a lender. This could potentially limit your ability to find the best mortgage deal for your specific financial situation.
Discipline Required:
While an offset account provides liquidity and access to funds, it also requires discipline. If you frequently dip into the account for non-essential expenses, you might reduce the impact of the interest savings on your mortgage. Maintaining a sufficient balance in the offset account is crucial to maximizing its benefits.
Redraw Facility: Tapping into Extra Repayments
A Redraw Facility is a feature of the mortgage loan account that allows you to access any extra repayments you have made on your home loan. When you make additional payments to your mortgage beyond the minimum required, the funds are deposited into the Redraw Facility. These extra funds can be later withdrawn if needed. Similarly to an offset account, the money you have sitting in redraw is used to “offset” the amount you owe on your home loan, and you’ll only be charged interest on the difference.
How a redraw facility works:
If your minimum monthly repayments are $700 per month and you pay $900 for a period of 12 months, you will have paid an extra $2,400. A redraw facility would allow you to access the extra $2,400 you have paid.
Advantages of a Redraw Facility
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- Access to funds – A redraw facility is a useful feature for those who want an emergency fund for unexpected situations or expenses and who don’t require regular or immediate access to their extra funds.
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- Savings – A redraw facility can be an excellent savings tool. Any excess funds put into your home loan are earning the same interest rate being charged on your home loan. By comparison, savings accounts generally pay much lower interest rates.
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- Interest and Tax benefits – There may potentially be tax advantages when using a redraw facility. Interest earned on your savings account is considered income and may be taxable, whereas any interest that is saved on your home loan by having money in a redraw facility will not be subject to tax and you’ll be building valuable equity in your property
Disadvantages or considerations associated with using a Redraw Facility
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- Fees and Charges: Some redraw facilities might come with fees or charges for making redraw transactions. These fees can eat into the potential savings you might achieve by making extra repayments on your mortgage. It’s essential to understand the fee structure associated with your redraw facility and factor these costs into your decision-making.
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- Minimum Redraw Amounts: Some lenders impose minimum withdrawal amounts for redraws. If you only need a small amount of money, you might be forced to withdraw more than you require, which could impact your interest savings.
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- Redraw Limits: Lenders might set limits on the maximum amount you can redraw, which could be lower than the total extra repayments you’ve made. This limitation could restrict your ability to access funds when you need them.
Offset Account and Redraw Facility
Choosing between an offset account and redraw facility on your home loan will depend on how accessible you need your money to be. You should also consider any associated bank fees with each facility.
Weigh up the pros and cons carefully to decide if an offset account or a redraw facility is best for you. You may prefer the convenience of the offset account as your everyday savings work for you to save interest without having to do anything.
Alternatively, you may prefer the discipline of the redraw facility as your extra repayments are ‘out of sight, out of mind’ in your loan and not as easy to access (normally an overnight process).
Which One is Right for You?
The choice between an Offset Account and Redraw Facility largely depends on your individual financial situation and goals.
You may decide to choose an Offset Account if:
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- You want to use an offset account as an everyday transaction account with easy access
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- You have substantial savings that can be used to offset your home loan.
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- You prefer to keep your savings and home loan separate for better tracking.
You may decide to choose a Redraw Facility if:
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- You intend to make extra repayments and want the flexibility to access those funds when needed.
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- You don’t have significant savings to keep in an offset account but still want to reduce interest over time.
Both an Offset Account and Redraw Facility are powerful features that can help you save on interest and pay off your home loan faster. While they share some benefits, their functionalities differ significantly. Carefully consider your financial priorities and consult with a mortgage broker or financial advisor to determine which option best aligns with.
FAQs
What’s the difference between an Offset Account and a Redraw Facility?
An Offset Account is like a regular bank account connected to your home loan. The money in it reduces the amount of interest you pay on your loan. A Redraw Facility, on the other hand, lets you take out any extra payments you’ve made on your home loan whenever you need them. A mortgage broker can help you find the option that matches your financial goals and day-to-day needs, making the whole process smoother and easier.
What are the benefits of an Offset Account?
An Offset Account lets you access your money easily without extra fees. It helps lower the interest on your home loan by using your savings to reduce the amount of the loan you’re paying interest on. Plus, the interest savings can be better than what you’d get from a regular savings account. It’s also a handy emergency fund, letting you save on interest while keeping your money accessible for other needs or investments.
Why use a Redraw Facility?
A Redraw Facility is useful if you’ve made extra payments and want access to those funds for emergencies. The extra payments you’ve made earn the same interest rate as your loan, which is typically better than what you’d get in a regular savings account. It also helps you build equity in your home, and the interest you save isn’t taxed.
Which option is better for everyday access to money?
If you need easy, everyday access to your funds, an Offset Account is probably the better choice. A mortgage broker can help you decide which option fits your day-to-day needs.
Can I use both an Offset Account and a Redraw Facility?
Yes, if your lender allows it, you can use both to get the best of both worlds. A mortgage broker can help you figure out how to combine them to save the most money and manage your mortgage effectively.
Disclaimer:
This page provides general information only and has been prepared without taking into account your objectives, financial situation, or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax, or financial advice and you should always seek professional advice in relation to your individual circumstances.
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