When it comes to managing your home loan effectively, there are various options to consider. Two popular features often offered by lenders are the Offset Account and the Redraw Facility. Both can help you save on interest and potentially pay off your mortgage sooner, but understanding the difference between the two is crucial to make an informed decision. In this blog, we’ll walk you through the basics of Offset Accounts and Redraw Facilities, shedding light on their unique features, benefits, and suitability for different borrowers.
Offset Account: A Powerful Tool to Trim Down Interest Payments
An Offset Account is essentially a transactional savings account linked to your mortgage. The key feature of this account is that the balance held in it offsets or reduces the outstanding principal of your home loan, effectively reducing the amount of interest you pay.
Let’s illustrate this with an example: Say you have a home loan of $500,000 and an offset account with a balance of $20,000. With an Offset Account, the lender would only calculate interest on the outstanding amount of $480,000 ($500,000 – $20,000). Over time, this reduced principal amount can save you a significant sum on interest charges.
The Perks of an Offset Account
1. Interest Savings: The most significant advantage of an Offset Account is its potential to save you money on interest over the life of your loan. The more funds you have in your offset account, the less interest you’ll end up paying.
2. Flexibility: An Offset Account offers transactional capabilities, allowing you to deposit and withdraw money as needed. This flexibility makes it an attractive option for those who require easy access to their savings. All offset accounts come with a debit card so you can use them for your everyday transactions, such as shopping, etc.
3. Tax-Free Savings: Unlike interest earned on regular savings accounts, the money saved through an Offset Account is not taxable, making it an even more appealing option for many borrowers.
Redraw Facility: Unleashing Your Loan Repayments
A Redraw Facility, on the other hand, is a feature offered with some home loans that enables you to access any additional repayments you have made beyond your required mortgage payments. Essentially, it allows you to “redraw” these extra funds if and when needed.
How the Redraw Facility Works
Imagine you have a home loan with a required monthly repayment of $1,500, but you consistently contribute $2,000 per month. Over time, these additional payments build up as a surplus in your loan account. Through the Redraw Facility, you can access this surplus whenever you require funds, such as for emergencies or other expenses.
The Benefits of a Redraw Facility
1. Saving on Interest: Like the Offset Account, the Redraw Facility can help reduce the interest payable on your home loan. By consistently contributing more than the minimum repayments, you can effectively shorten the loan term and save on interest.
2. Accessible Savings: The Redraw Facility offers a handy way to access your additional repayments without the need to apply for a separate loan or line of credit. (some lenders may charge a small fee for withdrawing funds from your redraw facility)
3. Debt Consolidation: The facility provides an avenue for consolidating other debts. By depositing extra funds into your home loan, you can potentially pay off higher-interest debts faster and save money in the process.
Key Differences: Offset Account vs. Redraw Facility
1. Interest Savings Mechanism: The primary distinction lies in how they save you money. The Offset Account directly reduces the interest payable by offsetting the loan principal with the account balance. In contrast, the Redraw Facility helps you save by allowing you to redraw additional repayments when needed.
2. Flexibility vs. Accessibility: The Offset Account offers transactional flexibility for everyday banking needs, while the Redraw Facility provides accessibility to additional repayments made above the required minimum.
3. Tax Implications: Money held in the Offset Account is not taxable, providing a potential tax advantage. In contrast, the Redraw Facility doesn’t offer any specific tax benefits.
Which Option Suits You Best?
The choice between an Offset Account and a Redraw Facility depends on your individual financial circumstances and goals.
An Offset Account is ideal for those who:
– Want to reduce their interest payments and potentially pay off their loan faster.
– Prefer transactional flexibility with easy access to their savings.
– Seek potential tax benefits on their savings.
A Redraw Facility is suitable for individuals who:
– Consistently make extra repayments and want the flexibility to access these funds.
– Need to consolidate debts or require easy access to additional repayments.
– May not need the transactional features of an Offset Account.
So there you have it
Both an Offset Account and a Redraw Facility offer valuable ways to manage your home loan effectively. By understanding their differences and benefits, you can make an informed decision that aligns with your financial needs and objectives. When it comes to choosing between the two, remember to consider your financial habits, long-term goals, and consult with a qualified financial advisor if necessary. Whichever option you choose, implementing either of these features can put you on the path to becoming mortgage-free sooner and enjoying greater financial freedom.
Go ahead and run your scenarios through our Offset calculator and also our Redraw calculator. If you are still confused or unsure, feel free to call on 1300 85 64 65 or find a convenient time to book for a meeting to discuss your options.
Happy home loan journey!