Offset Vs. Redraw: What Should I Choose for my Home Loan?
All home loans are not the same. You might have heard this statement often.
Yes, in addition to varying mortgage rates – different home loans offer different features and what is best for you may not be the best for your friend who is also buying a home at the same time. In short, as important as it is to find a home that fits your lifestyle, it is also vital to choose a home loan tailored to your financial situation and vision.
Understanding your home loan better
When searching for a mortgage, homebuyers usually look out for a low interest rate. However, that’s not enough. Presently, lenders are providing some great deals and discounts, in addition to extra features, flooding homebuyers with choices.
(Read about the top 5 features you need in your home loan).
Today, we discuss two of the most commonly subscribed features in home loans – an offset account and redraw facility.
Today, the majority of home loans offer offset accounts or redraw facilities. Some lenders are also offering these features with fixed rate home loans.
But why are these options so popular?
The answer is simple – both the features allow you to use your savings to reduce your loan balance, which means you save money on the interest you pay on your mortgage. Yes, there are other ways of repaying your home loan faster, such as making additional repayments. However, when you park your money in an offset account or use a redraw facility, you can access the extra cash you applied to your mortgage in the case of an emergency – so that you can utilise your savings optimally.
What is a redraw facility?
A redraw facility allows you to redraw the additional repayments made against your home loan. Here, you deposit any spare money directly into your home loan account that reduces your loan balance but you reserve the option to ‘redraw’ the additional money as and when required.
For example, if you have a mortgage of $300,000 at an interest rate of 4.00% for 30 years, your monthly repayment would be $1,432.25. If you deposit $20,000 into your loan account, your balance will reduce to $280,000. Therefore, you’d be only be charged interest on $280,000, and you would be able to ‘redraw’ any additional funds from your mortgage when needed. You can use our online repayment calculator to work out your weekly, fortnightly or monthly repayments.
Note that some lenders may charge up to $50 for a ‘redraw’ or cap the number of free ‘redraws’ or the amount you can redraw in a year. Compare home loans online to find the best deals for your situation.
What is an offset account?
An offset account is similar to a regular transaction account linked to your home loan. The benefit of using an offset account is that while you have full access to the money, the balance in your account is offset against your home loan principal daily, bringing down the amount of interest you pay.
Thus, the more the amount of money in your offset account, the lesser the interest you pay overall.
For instance, if you have a $300,000 home loan and $20,000 in a 100 per cent offset account, you will only be charged interest on $280,000. However, compared to a redraw facility, you can maximise your savings with an offset account by having all of your salary paid directly into an offset account. This ensures that your unspent income is used to reduce the balance of your loan and you can also maintain a high balance for the maximum number of days.
Offset vs. Redraw
In terms of saving money on interest, a redraw facility offers the same benefits as a 100 per cent offset account. So, how is one option better than the other?
Generally speaking, the only difference between the two options is that an offset account is, essentially, a savings account that gives you easier access to funds. Many of these accounts come with an ATM, and some may even have a credit card, making it simpler to withdraw money.
Redraws, however, often have restrictions in terms of the number of free redraws or the maximum amount you can redraw in a year. In terms of savings, either is fine, and the choice also depends upon your financial condition. Choosing an offset account makes sense if you have stable income and can maintain a decent balance in your offset account. Otherwise, a redraw facility works just as fine. However, if you are redrawing money from an investment property offset account for personal use, the interest on that amount would no longer be tax deductible. We suggest that you speak to a mortgage broker to understand your options better.
At HashChing, we give you access to 700+ verified mortgage brokers who bring you competitive home loan deals from over 70 lenders across Australia. You can also find a broker near you from our broker database to simplify your home loan journey.
By Vidhu Bajaj,
HashChing Content Writer