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.
Offset accounts are a transaction account which is linked to your loan and which has normal transaction account functionality, giving you ready access to your funds. The account’s balance (or a proportion of that balance) is ‘offset’ daily against your loan balance, and as a result you’re only charged interest on the difference between the total loan balance and the amount offset. If your offset account offers you 100% offset, every dollar in your offset account can reduce your home loan interest, every single day.
What does this mean in practice?
If you have a home loan balance of $300,000 and have $10,000 in your 100% offset account you’ll only pay interest on a home loan balance of $290,000.
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. This has the effect of reducing your outstanding loan balance, and 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However, there may be restrictions on how much money can be withdrawn and when, such as a minimum redraw amount. There may also be a redraw fee associated with redrawing money from your loan.
Offset Account VS Redraw
Both options give you the chance to save time and money – it all boils down to your personal preference, spending habits and strategies. Finding a loan that matches your needs is a lot easier with an expert on your side, so if you’re considering buying a home, an investment, or refinancing, contact us today.
Source: Mortgage Wisdom Australia