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Redraw vs Offset: Which Should You Choose for Your Home Loan?
By Deltos Finance on June 1, 2024
When taking out a home loan, you might focus too much on comparing rates and terms. We’re here to remind you to explore different home loan features before signing the dotted line. Two popular options that can help you save on interest and pay off your mortgage faster are redraw facilities & offset accounts. But which one is right for you? Let’s break down how each works, what to consider, and how to pick between the two. Here’s our quick redraw vs offset showdown.
Redraw Facility: How Does It Work?
A redraw facility enables you to pay more than your minimum loan repayments and then withdraw those extra funds if you need them. For instance, if your minimum monthly repayment is $2,000 and you pay $2,500, the extra $500 goes into your redraw facility. These extra payments reduce your loan balance and the interest charged, which can help you pay off your mortgage faster. And if you need the extra money later, you can redraw it from your loan account.
Things to Consider
- Accessibility: Redraw facilities are generally less accessible than offset accounts. You may need to request access through your lender and could face delays or fees.
- Discipline: This home loan feature is beneficial if you’re disciplined about making extra repayments and not withdrawing funds unless necessary.
- Loan Type: Redraw facilities are typically available on variable-rate loans and some fixed-rate loans, but not all lenders offer them. So, when picking between home loan redraw vs offset, you must consider the loan type that best suits your financial situation and other requirements.Â
- Tax Implications: If you plan to convert your home into an investment property, withdrawing funds from a redraw facility can affect the tax deductibility of your loan interest.Â
Offset Account: How Does It Work?
An offset account functions like a regular transaction account; you can use it to deposit and withdraw money. The only difference is it is linked to your home loan. So, the balance in this account can offset the amount you owe on your loan, reducing the interest charged. For example, if you have a $500,000 home loan and $50,000 in your offset account, you only pay interest on $450,000.
Things to Consider
- Flexibility: Offset accounts offer greater flexibility and instant access to your funds. You can use it for everyday transactions, bills, and savings.
- Fees: Some lenders charge fees for maintaining an offset account. Do the maths and ensure that the interest savings outweigh these costs.
- Loan Type: Offset accounts are usually available with variable-rate loans, though some lenders offer them with fixed-rate loans as well.
- Tax Benefits: You can enjoy some tax benefits with an offset account. Offsets do not typically generate interest as standard savings accounts do—interest that adds to your taxable income.
So, What Is the Difference Between Offset and Redraw?
The key difference between offset accounts and redraw facilities in Australia lies in their structure and the level of accessibility they provide to your extra funds.
An offset account is an entirely separate transaction account linked to your home loan. The money held in this account is offset against your outstanding loan balance when calculating interest charges. On the other hand, a redraw facility is not a separate account but rather a feature attached to your home loan. Any extra repayments you make above the minimum are accumulated in this redraw pool. While the funds in the redraw facility reduce the interest payable on your loan, accessing this money is typically less convenient than an offset account.
Here’s a quick summary of the redraw facility vs offset account:
Offset Account
- Separate transaction account linked to home loan
- Instant access to funds like a regular bank account
- Full account balance offset against the loan for interest calculation
- Usually with fees attached
Redraw Facility
- Not a separate account, just a loan feature
- Less convenient access; often requires a formal request to a lender
- Only accumulates extra repayments above minimums
- Potential fees and restrictions on redraws
How Do You Decide? Which Feature Should You Choose?
Choosing between a redraw facility and an offset account depends on your financial habits, goals, and preferences. Here are some factors to consider:
- How often you’ll need to access extra money
If you need easy access to your funds for everyday expenses, an offset account might be more suitable. If you prefer to keep your extra repayments less accessible to avoid spending them, a redraw facility could be better.
- Whether you can maintain the discipline to avoid dipping into funds unless absolutely neededÂ
If you’re disciplined about making extra repayments and not withdrawing them unless necessary, a redraw facility can help you pay off your loan faster.
- Any fees charged for offset accounts & redraw facilities by your lender
Compare the fees associated with each option. Ensure that the interest savings from using an offset account or redraw facility outweigh any additional costs.
- Whether you have plans to convert your home into a rental property
Consider your long-term plans. If you plan to convert your home into an investment property, an offset account could offer better tax benefits.
How Can Mortgage Brokers Help You Decide?
Mortgage brokers are invaluable resources when deciding between a redraw facility and an offset account. They can provide personalised advice based on your financial situation, goals, and preferences. They can help you calculate potential interest savings and fees, ensuring you make an informed decision on this battle: mortgage redraw vs offset. Plus, they can advise on the long-term implications of each option, including tax considerations and the impact on your financial goals.
Engage with Our Mortgage Brokers in Hobart
In conclusion, both redraw facilities and offset accounts offer unique benefits that can help you save on interest and pay off your mortgage faster. But you have to fully understand how each option works and consider your financial habits and goals to choose the option that best suits your needs. If you still can’t pick one in the offset account vs redraw facility showdown, consult with a local mortgage broker.
At Deltos Finance, we have experienced mortgage brokers in Hobart, Launceston, Devonport & other nearby cities and towns. They are ready to provide expert guidance to help you make the best decision for your home loan journey.
Contact us today to get started.
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