A common question that is asked by your bank or mortgage broker when applying for a mortgage for the first time, or perhaps re-financing – redraw or offset? Many factors need to be taken into consideration when choosing which option is right for you, must most importantly understanding how they both work.
How to redraw facilities and offset accounts work?
Both redraw facilities and offset accounts allow customers to decrease the total interest paid on their mortgage, shaving years off the lifespan of their loan.
Redraw facilities allow home loan customers to withdraw repayments made on top of their minimum requirements at a later date, but the extra funds are housed inside their home loan.
For example, if a customer’s average monthly repayment is $1,000, but they repay $1,200, they would have $200 available to redraw.
In comparison, offset accounts sit external to a loan and effectively decrease the principal on which interest is payable.
So, if an offset account has a balance of $10,000 and is linked to a $300,000 home loan, interest would be paid on $290,000.
What are the key differences?
While redraw facilities enable homeowners to use additional repayments in times of need, there’s an amount of risk as it is attached to a mortgage. As those repayments belong to the lender, they can access the facility at will.
Most banks can also enforce a maximum withdrawal limit and adjust the amount of redraw in a home loan, dependent on the fine print in the agreement – which is usually communicated to the customer before being enforced.
Offset accounts largely function as everyday bank accounts and can be accessed at any time, though some require withdrawals to be transferred to a separate savings account.
There are two main types of offset accounts: Partial offset accounts, which have lesser fees but only offset the customer’s mortgage by a portion of their account balance (by 50 per cent, for example), and 100 per cent offset accounts, which have greater fees but offset the entire account balance against the home loan.
In either case, any money left in the offset account is guaranteed by the government up to $250,000, which protects customers’ savings in the event a lender becomes insolvent.
Although most offset accounts offer higher interest rates than savings accounts (as they are based on home loan rates), they charge monthly or yearly fees that sometimes overshadow the interest saved.
How do I find the right option for me?
Prospective property investors would benefit more from offset accounts, as they reduce a loan’s interest and would allow them to use the extra funds as the deposit for their next home.
Investors usually often use interest-only loans to fund their purchase.
However, home loan customers who are less assured in their spending habits may find redraw facilities reduce the temptation to take out additional funds because of their banks imposed limits.
In any case, customers should reflect on their financial conditions before determining what’s suited to them and seek professional advice.