There’s a lot more to a home loan than just the interest rate. The features of the loan can also have a big impact on your total mortgage costs and repayment flexibility, which is why it’s important to understand the potential benefits of a redraw facility and an offset account. It is no secret that I love offset accounts for your owner-occupied loan.
Redraw and offset have one thing in common – they reduce the amount of interest you get charged. If, for example, you have $500,000 outstanding on your loan and $40,000 in either redraw or offset, you’ll be charged interest on only $460,000 (i.e. $500k minus $40k).
But there are subtle differences between the two features.
Redraw is a facility that sits within your loan. The way you accumulate money in redraw is by making extra home loan repayments (even a lump sum). The lender will allow you to borrow back (or redraw) these extra repayments, subject to certain conditions. But because this money belongs to the lender, it’s technically possible the lender might decide one day not to allow you to reclaim the money or change the conditions of redraw.
Offset is a separate transaction account that’s linked to (but separate from) your home loan account. The way you accumulate money in offset is through deposits – for example, salary payments. The money in your offset belongs to you, so the lender can’t prevent you accessing it. The best way to use offset is via constantly having your income placed into the offset account, as interest is offset daily, this accumulates over time. An extra step as most of you would know is having multiple-offset accounts to assist with budgeting.
• Pros: you can use redraw and offset to reduce your interest bill and pay off your home loan sooner.
• Cons: your lender may charge you a higher ongoing fee or higher interest rate to access these loan features. Also, you may be charged a fee for each redraw transaction.
