An Offset Account or a Redraw Facility: Which is Right for You?
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Both offset accounts and redraw facilities can help you pay off your mortgage faster and pay less interest in the lifetime of your loan. You could take advantage of one or the other, and in certain circumstances, it may be possible to benefit from both. But you need to understand what they are, how they work, and the similarities and differences between them before you can decide which option would work best for you.
Offset Accounts Reduce How Much Interest You Pay
An offset account functions much like a regular deposit account except that it’s linked to your mortgage. Your employer can pay your salary into the offset account and you can make regular payments or occasional extra deposits as you wish. You can also spend money from the account with a debit card. The key feature of the offset account is that the running balance is used to offset the interest payable on your loan repayments. So, for example:
If you have $250,000 outstanding on your mortgage, and you have an offset account with a balance of $25,000 and a 100% offset arrangement, when your payment falls due, you’ll pay the same amount as usual but you’ll only pay interest on $225,000 ($250,000 – $25,000). A higher portion of your repayment goes toward paying down the loan rather than vanishing into interest charges. It’s common to have a lower offset percentage on your account. So, with a 75% or 50% offset arrangement, you’d pay interest on $231,330 or $237,500 respectively. Keeping a healthy balance in your offset account reduces your interest and helps you pay off the mortgage much sooner.
Redraw Facilities Allow you to Access Additional Repayments
You could benefit from a redraw facility if you can afford to make extra payments on your home loan. For example, with a redraw facility, you might pay an extra $50 a month on your mortgage. Over 12 months, you’d have reduced your loan by $600. But the funds are still available to you to draw on (or ‘redraw’) should you need; perhaps to cover an unexpected expense or pay for something special.
Similarities and Differences
So, in short: an offset account is like a regular transaction account, but the balance offsets your interest payments. A redraw facility allows you to make added repayments but the funds are still available to you if you need to use them. With an offset account, you can withdraw as much as you wish whenever you want, either in cash or by making card payments. However, with a redraw facility, you might not be able to withdraw cash or make debit card payments. Lenders may also set minimum redraw limits.
A redraw facility often isn’t as flexible as an offset account. There may also be differences in the tax-deductibility of your loan if in the future you decide to let the property, for example. Typically, you’ll have more flexibility with an offset account, but you should take advice before deciding between them.
Which is Right for You, an Offset Account or a Redraw Facility?
The answer depends on you and your circumstances. If you have a reasonable salary and you’re good with your money, often spending less than you earn, an offset account could be a great choice for you. If you can afford to pay a little extra most months, but don’t need or want easy access to the money, then a redraw facility could be a better choice. In special circumstances, you might find having both works to your advantage.
Whichever you choose, both an offset account and a redraw facility can lower your interest payments and help you pay off your home loan earlier. But you need to consider your income, other assets, needs, and aims before deciding which is best for you.
If you want advice or need to discuss your situation, speak to one of our finance experts at GA Finance today.