Offset or Redraw? Do they actually help?
Can redraw and offset accounts save you money?
Offset accounts and redraw facilities work in similar ways; they both allow you to reduce the balance of your home loan, and therefore the interest charged by reducing your loan balance.
Redraw facilities allow you to deposit spare income into your home loan account, allowing you to redraw a sum equal to the extra repayment amounts in future.
In the meantime, the extra money paid will lower the amount of interest charged while still giving you access to your money.
However, there may be restrictions on how much money can be withdrawn and when.
For redraw, it depends on whether the facility applies to a fixed-rate or variable loan. Most institutions only allow redraw from a variable-rate loan. There are options out there if being able to redraw from a fixed rate is important to you but you will need to be careful.
It is important to find out how a loan’s redraw facility works before taking it on, as the fees and restriction attached might outweigh the benefits of interest savings.
Deciding between an offset account and a redraw facility on your home loan largely depends on how accessible you need your extra money to be.
Offset accounts are like savings accounts that function alongside your home loan. You earn interest on the money in the offset account and you often have a debit card attached for simple withdrawals.
With 100 per cent offset accounts, you earn interest equal to the interest you are paying on your loan. Rather than earning savings account rates, you are earning home loan account interest rates on the money held within the offset account.
Let’s say you have $10,000 in your 100 per cent offset account. Instead of paying interest on your $100,000 loan, you are only paying interest on $90,000. This could be saving you around $600 per year on your interest repayments.
Offset accounts, like many savings accounts, often come with account fees, but the fee may be worth the interest savings and the added flexibility compared to redraw facilities. There are less restrictions attached to 100 per cent offset accounts, they’re very flexible. There can also be tax benefits that come with an offset account when attached to your investment loan that are worth talking to your accountant about.
Finding a loan that matches your needs is a lot easier with an expert on your side.