Offset vs redraw facility: What you need to know

Posted on Wednesday, October 17, 2018 - 16:33

Home loans come with features that can be added to it that will make paying off your mortgage easier. An offset account or redraw facility are some of these features that you can use which are easy to set up and help you make your way to paying off your mortgage, but if you are left scratching your head trying to figure out what these are and how they work this guide is for you.

What is an Offset account?

An offset account is a savings account or transaction account that can be linked to your home loan account. This is a handy feature that can come in handy for Australians that are looking for ways to reduce their mortgage by using the accounts balance to offset your home loan balance. What this means is that your lender will charge you less interest since they will not be charging you interest on the full balance of your loan.

For example:

If you have taken out a loan of $450,000 with $100,000 already linked in an offset account and you have repaid $100,000 you will only pay interest on the $250,000 balance. However, this will also depend on what type of account you have. There are offset accounts that can be linked to a variable rate loan or fixed rate loan, but some home loans could require that the offset account is attached to a fixed term loan.

Pros of an offset account

  • Cut down the years on your mortgage.
  • Easy to set up and maintain if your offset account is automated.
  • Can save thousands of dollars in terms of interest.

Cons

  • You could possibly pay an additional fee for a loan that has an offset account.
  • Depending on how long it takes to pay off your loan you could still pay a higher interest rate.

What is a redraw facility

A redraw facility essentially allows you to borrow the money that you have already repaid. This feature is usually used by Australians that are faced with unexpected circumstances or need the money to perform renovations on the house. This feature tends to come with variable rates that need to be considered before opting for it. It can also allow you to be flexible in terms of how you repay the loan.

For example:

If you have to pay a minimum monthly repayment of $400 but choose to pay $200 extra for 8 months consistently you would have paid an additional sum of $1,600 which you can access through your redraw facility for an emergency.

Pros of a redraw facility

  • Money in the redraw facility can be used to reduce loan amount.
  • Can be beneficial in paying off your loan quicker.
  • Can be redrawn to take care of emergencies.

Cons

  • Be careful of additional fees that come with withdrawing and depositing money.
  • Providers can charge you fees immediately on redraws or can restrict how often you can redraw.

Comparing the two can help you find a feature that will be beneficial to your circumstance, but also remember the fees that come with such features to make this viable. Always keeping mind to find something that will work with your long term financial goals and will be able to be sustained by your income.

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