Offset Account vs. Redraw Facility
Which Option Suits You Best?
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When managing your home loan, choosing between an offset account and a redraw facility can significantly impact your financial situation. Both tools can help reduce the interest on your mortgage, but they work differently and may be more or less suitable depending on your needs.
Understanding Offset Accounts.
An offset account is a transaction account linked directly to your home loan. The balance in this account offsets the amount of your loan on which interest is calculated. For instance, if your home loan balance is $400,000 and you have $30,000 in your offset account, you’ll only be charged interest on $370,000.
Example
Let’s say you receive regular rental income from an investment property into your offset account. Over time, the accumulating funds reduce the interest you pay on your home loan, potentially allowing you to pay off your loan faster.
Advantages of an Offset Account
The more you have in your offset account, the less interest you pay.
01.
Significant Interest Savings
02.
Easy Access
03.
No Tax on Savings
Your funds remain accessible whenever you need them, just like a regular bank account.
Unlike interest earned from a savings account, the interest savings on your mortgage aren’t taxed.
Disadvantages of an Offset Account
01.
Higher Fees
02.
Minimum Balance Requirements
Offset accounts often come with higher account maintenance fees.
Some lenders might require you to maintain a minimum balance to benefit from the offset features.
Understanding Redraw Facilities
A redraw facility allows you to make extra repayments on your home loan, effectively reducing your loan balance and the interest charged. However, these extra payments aren’t locked away—you can access them if needed, although this may come with some restrictions.
Example
Suppose you receive an unexpected bonus at work and decide to make a lump sum repayment on your home loan using the redraw facility. A year later, you plan a family holiday and decide to access some of those extra funds to cover the costs.
Advantages of a Redraw Facility
01.
Interest Reduction
Making extra repayments reduces your outstanding loan balance, thus lowering your interest payments.
02.
Encourages Saving
Since accessing these funds can be less convenient, it can encourage better saving habits.
Withdrawing from a redraw facility can take time, and there may be restrictions on the amount and frequency of redraws.
Disadvantages of a Redraw Facility
01.
Limited Access
02.
Potential Fees
Some lenders charge fees for redraws, and you may need to meet certain conditions to access your funds.
Choosing the Right Option for You
Whether an offset account or a redraw facility is more suitable depends on your financial habits and future needs. An offset account may be better if you want immediate access to your funds and are comfortable with potentially higher fees. Conversely, if you prefer a more disciplined approach to extra repayments and don’t need instant access, a redraw facility might be the way to go.
Can I Use Both Offset and Redraw?
Yes, it’s possible and often beneficial to use both an offset account and a redraw facility together. For example, you might deposit your salary into an offset account to reduce your interest payments while making extra repayments into your home loan and accessing those funds later through a redraw facility.
Need Expert Advice? Contact Loanbox!
Making the right choice can save you money and help you achieve your financial goals sooner. If you're unsure which option best suits your needs, the team at Loan Box is here to help. We can provide personalized advice based on your specific situation.