When looking for a home loan, a low interest rate isn’t the only thing you need to consider – it’s also important to look into your options to set up redraw and offset accounts. Below we’ve explained what an offset account is and what a redraw does to help you consider your options when the time comes for your home loan.
A mortgage offset account is an everyday account linked to your home loan. You can make deposits or withdraw from it as you would with a regular account. However, because it’s linked to your loan account, it essentially counts towards a paid balance on your mortgage – meaning you pay less interest. It “offsets” the balance of your loan.
For example: if you have a $500,000 home loan and you have $20,000 in your offset account, you will only be charged interest on $480,000.
Each month your repayments will still be the same, but more of your money will go towards paying off your home loan rather than paying the interest owed to the bank. An offset account helps you pay off your mortgage quicker with less interest, while having the ability to access the money you have in your account.
Things to consider: Be careful, some offset accounts don’t count 100% of your funds, depending on your account some may only count 80% or less. There is also often a monthly or annual fee and it’s important to double check your interest rate, as some offset offerings can increase your rate.
Unlike offset, redraw is not a separate account but the additional funds you pay that sits separate within your home loan. The way redraw works is simple: if your monthly repayments are $1500 and you pay $1700, you will have an additional $200 sitting in your account shown as redraw.
Redraw is a little more difficult to access. You don’t have a debit card like you would for your offset account, and depending on your lender there may be a minimum redraw amount or limit on how often you can redraw. This may work to your advantage though – the harder it is to access, the easier it is to save.
Having money in your redraw essentially contributes to saving time and money on your home loan. If you can still access your redraw without fees this can potentially be a better option than a savings account.
Things to consider: As mentioned above, some lenders may charge a fee for each redraw. You may also have restrictions on how many redraws you’re able to make. It’s important to look into the terms and conditions before accessing your funds.
While these two home loan features fundamentally have the same concept, there are pros and cons to each. Depending on your situation there is normally one that benefits your circumstance more. Everyone has their own individual saving and spending habits, so it’s important to make sure you’re using them to their full potential. It’s also important to consider the tax implications with each option if you have an investment property.
Get in touch so we can look into what suits you and your needs best and steer you in the right direction.