28 Dec 2017
What’s The Difference Between Redraw And Offset And Do I Need Them?
House hunting? Then you’re probably researching your home loan options and tossing up between which feature will save you the most in interest and help you pay off your loan faster.
Most home loans will offer an offset account or redraw facility, or maybe even both features. Once you know their benefits and the difference between the two, you will be in a better position to decide which one will work better for your needs.
So, what’s an offset account?
An offset account is an everyday transaction account that’s linked to your home loan. As the name suggests, every dollar you put into this account – from your salary to tax refunds or lump sum bonuses – will offset daily against your loan balance. What that means is the balance in your offset account reduces your loan balance. As interest is calculated daily on the closing loan balance, you will save on the amount of interest payable for as long as you have savings in your offset account.
One thing you should ideally look out for is a 100% offset account, which will offset your loan balance in full. For example, if you have a $500,000 home loan and $25,000 savings in your offset account, you would be paying interest only on $475,000 of your home loan.
The redraw facility works similarly but is different
A redraw facility allows you to make unlimited extra payments directly into your home loan, on top of your minimum loan repayments. You can access these additional amounts down the line when needed, and as long as you leave the money in your home loan, it reduces your loan balance and the interest you pay.
Whether you’re saving up for a holiday or a new car, you could use your home loan as a ‘savings account’ and channel all your spare cash into your loan. It will save you interest, which will be much much more than the interest you would earn keeping you extra funds in a regular savings account. Then when you’re ready to make a purchase simply use the redraw facility to withdraw the extra payments you’ve made.
Some Mortgage House home loans with a redraw facility allow you to skip a mortgage repayment as long as you have enough funds in credit to cover that mortgage repayment. Redraw facility is a great way to save while chipping away at your home loan, all the time knowing that you will be able to access the funds when required.
Offset vs Redraw – the verdict?
You would benefit in a big way from either loan feature, and your choice would depend entirely on your preference.
Do you want to reduce the interest you pay on your loan while having easy everyday access to your savings to pay for daily expenses? Then an offset account might be what you need.
Or is your primary focus to pay off your home loan as quickly as possible and be debt free at the earliest? Then a redraw facility might be better suited to you.
It’s important to keep in mind that whatever you decide, any extra you put into your home loan will save you a significant amount of money in loan interest over the term of your loan.
Mortgage House
At Mortgage House, we’re no strangers to the homeowner’s journey. It’s a long (but rewarding) one.
But don’t worry, we can help with that.
If you’re thinking of buying a home, you can contact us for information about the best options for you when it comes to your mortgage.