Be smart with your mortgage - use an offset account and a redraw facility

Share

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:


OffsetRedraw
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 themI’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 exampleIf 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?
  • Offsets accounts are an optional extra which come at a price, like with higher interest rates or fees
  • If you keep your offset account balance low (like in the example above) the account keeping fees may outweigh any benefits you get from having it
  • Not having a 100% offset account (ie the best kind). A partial offset account differs in that it will only offset a percentage of the balance in your offset account, not the full amount
  • Like the offset, it's an optional extra which comes at a cost
  • Fees charged by the lender for making too many or too few payments and, or withdrawals. You have to get the balance right
  • Not as easy to access (its not same-day at call like an offset)
  • You don’t get credit cards linked with this facility (which may be considered a positive in some cases!)
What else will it do for me?
  • Accepts your salary and savings and as long as you don’t withdraw it all at once, your offset account balance will be fairly high (and fees kept low)
  • By paying for all your daily transactions with the credit card given to you by the lender, you’re keeping your offset account balance as high as possible for the whole month. If you don’t repay your total credit card bill each month any savings or benefits you gain from your offset account will be wiped out by credit card interest
  • You can withdraw money when and how you want without fees being charged
  • Pays your home loan off quicker than the offset would (if used correctly)
  • You can have some or all of your salary (or any cash like a bonus from your employer) paid into the redraw and use it to pay bills or use EFTPOS to withdraw funds for emergencies. If you don’t conduct your transactions within your lenders rules this becomes a disadvantage

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.

Get your finances back on track Create a free account on Map My Plan today


A roadmap before investment journey

There are now more automated investment providers on the market than ever, targeting the 80% of Australians who are not seeking advices from financial planners. Whilst a good tool to have for first time investors, most of these ‘robo-advisors’ tend t

read more >

Gen Y housing affordability concerns can be ignored for only so long

Late last week the Turnbull Government-dominated Parliamentary Economics Committee released its report on housing affordability. Rather than reforming negative gearing or other demand side drivers, the Report suggests the housing affordability proble

read more >

2016 Financial Fitness Report

Personal finance issues are the leading cause of stress in Australia, and financial wellbeing is recognised as an integral part of overall wellbeing. Yet, to date, very little research has been done in Australia to measure the state of our financial

read more >

What’s the new story with super?

Its been said there are two certainties in life: death and taxes. The government's federal budget introduces a third: changes to super

read more >

Time for a rich list reality check

The web is full of blogs and articles telling you how to get rich through the stock market. Investor strategies, new apps to invest your spare change, online investment platforms...

read more >