Redraw facilities and offset accounts work in a similar way – essentially they both allow you to reduce the balance of your home loan, which reduces the amount of interest you pay in the long run.
Often we’re asked by clients whether they should choose a home loan with both a redraw facility and offset account built-in? To help you decide, here are some of the pros and cons of both.
Redraw facilities
With a redraw facility, you can deposit spare funds into your home loan account, but still draw the money back if needed. You can either make extra repayments above the minimum requirement or throw in a lump sum every now and then.
The pros:
By making extra repayments you’ll be potentially paying off your loan sooner than the initially set loan term.
Use it to save money without locking up your funds.
The cons:
There may be restrictions on how much money can be withdrawn and when. There may not be same-day withdrawal, for example.
Additional fees may be applicable if not done via internet transfers
If monies are deposited and then withdrawn, there may be tax implications if the loan is used for ‘investment purposes’
Offset accounts
An offset account is a transaction account that’s linked to your home loan, but pretty much functions as a regular everyday account. Normally, you can deposit money into an offset, make withdrawals and buy things using a debit card linked to it as required.
The main perk of an offset account is that deposited funds are offset against your loan balance, saving you in interest.
Here’s an example of how an offset account works. Let’s say you have a $300,000 loan and $10,000 in your 100 per cent offset account. Instead of paying interest on your $300,000 loan, you will only pay interest on $290,000.
In some instances, lenders may offer a partial offset option, meaning only some of the balance of your offset account is taken into consideration.
The pros:
Lowers the interest you pay (based on the balance of the account), while still giving you access to your money.
Your money is working harder for you in an offset account by cutting down your interest.
The cons
There may be additional charges for an offset account. However, the fees may be worth the interest savings and the added flexibility compared to redraw facilities.
With most lenders you can only offset a variable loan (some exceptions do exist)
Would like to know more?
Deciding between a redraw facility and an offset account largely depends on how accessible you need your extra money to be and your personal circumstances.
In some cases, a combination of both may work – that is, the option to keep your spending money in an offset account and tuck funds you’re unlikely to need into a redraw facility. Speak to us to explore your options.