Be smart with your mortgage - use an offset account and a redraw facility
Around 69% of all home loans in Australia have a redraw facility, while 40% have an offset account. Some have both. So who’s acting in their own best interests?
Before we answer that question and offend you, let’s put them under the microscope.
Both allow you to use any extra income or savings to reduce the balance of your loan, thereby reducing your interest repayments.
They also provide you with access to money which can be used to invest in property, shares or managed investments, for example. This is known as negative gearing and offers some very attractive tax breaks which we’ll have to leave aside for another article.The features that each offer, and how you use them, is what sets them apart:
|I'd use it because...||I’m not fixated on paying off my mortgage as quickly as possible. I need a transaction account which allows me to reduce the interest on my loan repayments and access to funds when I need them||I’m focused on paying off my mortgage as quickly as possible and not making many withdrawals (except in emergencies)|
|How does it work?|
It’s like a savings account that hooks into your mortgage. The best kind will ‘offset’ your loan balance each day against whatever money you have in the account.This reduces the interest you pay over the life of your loan
|You put extra money straight on the loan. By doing this you are repaying principal, rather than simply reducing interest.|
As long as you do this at least a few times a year you’ll make the most of this facility and eliminate your mortgage more quickly (than without it)
|I'd like an example||If you have a loan of $800,000 and a balance of $20,000 in your offset account, you’ll only pay interest on the $780,000 (and not on the $20,000)||Assume your minimum monthly repayments are $1,000. If you pay $1,300 each month for a period of 6 months you’ll have paid an extra $1,800 on top of what you had to pay (i.e. 6 x $300).|
A redraw facility allows you to access that extra $1,800 if you need to – but don’t unless its an emergency (because they’ll probably charge you fees if you do it too often and this could cost you what you’ve saved)
|What's the downside?|
|What else will it do for me?|
So which is best?
As you can see they are similar but each have their own special features. So that you have the best of both worlds we recommend you get both when negotiation a home loan.
Don’t forget to consider your budget, your income and your long term financial goals. Both offset and redraw accounts have their benefits, so think about what you want and then compare various home loans until you get the best deal.
If you found this useful, you won't believe how awesome our other articles are! If you get a spare ten minutes, check them out in our Resources section.