The Difference Between Offset and Redraw Facilities
Understanding the Difference Between Home Loan Offset Accounts and Redraw Facilities
In the world of home loans, there are various features and options available to borrowers to help manage their finances effectively. Two commonly confused features are offset accounts and redraw facilities. While both can be beneficial in reducing interest payments and saving money, they operate differently and suit different financial needs. Let's delve into the details to understand the disparity between these two options.
Offset Accounts:
An offset account is a separate savings or transaction account linked to your home loan. The balance in this account is offset against the outstanding balance of your home loan before interest is calculated. Essentially, the money in the offset account reduces the interest you pay on your mortgage.
Note: some lenders offer partial offset accounts as opposed to 100% offset accounts. For this example, we are referring to 100% offset accounts (meaning that 100% of any funds sitting in the offset account will be used to offset the loan balance).
Here's how it works:
- Interest Savings: Let's say you have a home loan of $300,000 and an offset account with $20,000 in savings. Instead of paying interest on the full $300,000, your interest is calculated on $280,000 ($300,000 - $20,000). This reduces the interest payable.
- Flexibility: You can deposit and withdraw funds from the offset account as needed, just like any other bank account. This provides flexibility and liquidity while still benefiting from interest savings.
- No Impact on Loan Repayments: Your regular loan repayments remain the same regardless of the balance in the offset account. The savings from the offset account directly reduce the interest payable, potentially saving thousands of dollars over the life of the loan.
- Potential Tax Benefits: An offset account can be especially useful if the purpose of the borrowed funds were originally for investment purposes (or, if the property purchased with the funds will become an investment in the future). This will depend on your individual circumstances, and we recommend you seek independent financial advice from an accountant or financial advisor.
- Cost: Loan products that offer an offset account can often attract an ongoing fee or higher interest rate (sometimes both).
Redraw Facilities:
A redraw facility allows you to make additional repayments on your home loan, above the required minimum, and then redraw those extra funds if needed. It essentially functions as a loan feature that enables borrowers to access their additional repayments.
Here's how it works:
- Extra Repayments: Suppose you have a monthly mortgage repayment of $1,500 but decide to pay $2,000 per month. The additional $500 accumulates in your redraw facility, effectively reducing the outstanding loan balance.
- Access to Funds: If you require funds for emergencies or other purposes, you can redraw the extra repayments you've made. This can generally be done online, through mobile banking, or by contacting your lender directly.
- Impact on Interest Payments: If you have made extra repayments to your home loan and have accumulated additional funds sitting in a redraw facility (if your home loan product is eligible), the loan balance will be lower (compared to if you hadn’t made any extra repayments). Interest is charged on the loan balance (normally calculated on a daily basis). So, if you have accumulated additional funds sitting in a redraw facility, you will pay less interest on your home loan compared to if you had no funds sitting in redraw.
- Potential Tax implications: If the purpose of the borrowed funds were originally for investment purposes (or, if the property purchased with the funds will become an investment in the future), be careful when redrawing money for personal (non-investment) purposes. This may impact the tax-deductibility of the loan. This will depend on your individual circumstances, and we recommend you seek independent financial advice from an accountant or financial advisor.
- Cost: Although not all loan products offer a redraw facility, it is common for most basic variable rate loan products to offer free redraw with no additional fees. This will differ from lender to lender.
Choosing the Right Option:
The choice between an offset account and a redraw facility depends on your individual circumstances, financial goals and account preferences. If flexibility and tax implications are important to you, an offset account might be more suitable. On the other hand, if you prefer to make additional repayments directly to your loan and do not require direct access to this money (e.g. via a debit card), a redraw facility may be a better option.
It is also worth noting that Offset Accounts and Redraw Facilities are generally only available on Variable Rate Home Loan products (not Fixed Rate Home Loan products), with the exception of some lenders.
Before making a decision, it's important to assess your financial situation, consider your short and long-term goals, and consult with a mortgage broker (and potentially an accountant or financial advisor).
Both offset accounts and redraw facilities offer valuable benefits to homeowners, but they serve different purposes. Understanding how each feature works and evaluating your financial objectives can help you make an informed decision that aligns with your goals and helps you save money over the life of your home loan.
Contact us today to book an appointment with Priority Home Loans Newcastle.