What are Offset Accounts?
An offset account is a transaction account linked to your home loan. The balance in your offset account is “offset” against your loan balance, reducing the amount of interest you pay. Essentially, you’re only paying interest on the difference between your loan amount and the balance in your offset account. Many banks and lenders are offering multiple offset accounts which means you can offset interest against the total of all the savings held in all those accounts.
Key Points:
- The money in your offset account remains accessible.
- It effectively reduces your loan’s principal for interest calculation purposes.
- You can use it as your everyday transaction account with debit card.
- It can significantly shorten your loan term and reduce interest costs.
Example:
Let’s say you have a home loan of $700,000 and two offset accounts with $80,000 in one and $20,000 in another. You’ll only be charged interest on $600,000 ($700,000 – $80,000 – $20,000). If you deposit your salary of $9000 into the offset account, your interest is reduced even further for that period.
What are Redraw Facilities?
A redraw facility allows you to access any extra repayments you’ve made on your home loan. If you’ve paid more than the minimum required repayment, that extra amount can usually be withdrawn. Please ensure your lenders have activated the redraw feature.
Key Points:
It provides flexibility to access extra funds when needed.
- The funds you redraw were previously used to reduce your loan principal.
- Some lenders may have restrictions or fees on redraws.
- Redraw funds are not as readily available as funds within an offset account.
- Some lenders hold onto redraw till interest charged date or next repayment date.
Example:
You’ve been making extra repayments and have built up $100,000 in available redraw. As you have paid down your loan by $100,000, interest will only be charged on $600,000. Lets say you need $10,000 for home renovations, you can apply to redraw $10,000 from your loan, reducing your available redraw to $90,000. Then you will be charged interest on $610,000.
Please be aware that redrawing funds increases the amount of your loan principal, and therefore the amount of interest you will pay over the life of the loan.
Offset Account vs. Redraw Facility: Which is Right for You?
Offset Account: Ideal for those who want to actively manage their cash flow and reduce interest daily. Great for those who have a regular income and savings. Also suitable for those who wants a convenience and easier/flexible banking experience.
Redraw Facility: Suitable for those who make occasional extra repayments and want a safety net for unexpected expenses. Also suitable for someone who is looking for low rate home loan without bells and whistles.
Important Considerations:
- Some lenders offer lower headline rate for the home loan without offset accounts. Most of these home loans are named as Basic or Simple loan that has only one account and have redraw facility. To get the best out of those loans, borrowers transfer almost all savings into those accounts and redraw when needed.
- Home loans with offset accounts normally comes as a package product. Some lenders charge higher rate, some charge monthly/annual fees for having offset accounts.
- Some lenders are open to negotiation on interest rates with the package product i.e. one with the offset
- Few lenders offer multiple offset account that gives quite a flexibility to borrowers. For example if borrowers want one account as savings, individual accounts for salary credit, separate accounts for kids savings, separate account for expenses etc, having all these accounts linked as offset can help you save interest on every dollar you have in those accounts.
How We Can Help:
As your mortgage broker, I can help you:
Determine which loan features best suit your financial needs.
- Compare loan products from various lenders.
- Assist you on every steps of home buying, loan strategy or refinancing journey.
- Explain the fine print and answer any questions you may have.
If you’d like to discuss offset accounts, redraw facilities, or any other aspect of your home loan, please don’t hesitate to contact our Broker Anup on 0415900264 or email [email protected]
