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.
Deciding between an offset account and a redraw facility on your home loan largely depends on how accessible you need your extra money to be.
Redraw facilities
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 the future.
In the meantime, the extra money paid will lower the amount of interest charged, while still giving you access to your money.
E.g. If you have a home loan of $500,000 at 3.00% and you have $50,000 in your redraw account, you will only be charged interest of $450,000. That’s a saving of $64,820 over the life of the loan and pays off the loan 2 years and 7 months quicker.
However, there may be restrictions on how much money can be withdrawn and when. Most institutions only allow redrawing from a variable-rate loan, or with limited access from a fixed-rate loan. It’s important to find out how a loan’s redraw facility works before taking it on, as the fees and restrictions attached might outweigh the benefits of interest savings.
Offset accounts
Offset accounts are like savings accounts that function alongside your home loan. You earn interest on the money in the offset account and you often have a debit card attached for simple withdrawals.
With 100% offset accounts, you earn interest equal to the interest you are paying on your loan. Rather than earning savings account rates, you are earning home loan account interest rates on the money held within the offset account.
For example, you have $20,000 in your 100 per cent offset account. Instead of paying interest on your $500,000 loan at 3.00%, you are only paying interest on $480,000. If you had $20,000 sitting in an offset over the course of your loan you would save approximately $27,817 over the life of the loan and pay your loan off 1 year and 1 month faster.
Offset accounts, like many savings accounts, often come with account fees, but the fee may be worth the interest savings and the added flexibility compared to redraw facilities.
Both are great options to save money so speak to your mortgage broker to see what the best feature is best for you.
If you are planning to get your very first home loan, don’t hesitate to give us a call. Sparks Finance is a local Bathurst Mortgage Broker and is ready to guide you throughout the process.
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