Two common features of a home loan are offset accounts and redraw facilities. What's the difference between them, and how do they work?
To help unravel the confusion between the two, let’s explore the details of an offset account and a redraw facility.
1. Offset Accounts
What Is an Offset Account?
An offset account is a transaction account linked to your home loan. It functions like a regular savings account, allowing you to deposit and withdraw funds.
The key advantage lies in how it affects your interest payments. The money in your offset account offsets the outstanding balance of your home loan daily. As a result, interest is charged on the reduced amount rather than the full loan balance.
Some offset accounts are “100% offset,” considering the entire balance, while others may be “partial offset,” considering only a portion of the balance.
Advantages of an Offset Account
Reduced Interest: By offsetting your savings against your loan balance, you pay less interest.
Instant Access: You can access your funds instantly without restrictions.
Flexibility: Works well with variable rate home loans and can also be linked to fixed-rate loans.
2. Redraw Facilities
What Is a Redraw Facility?
A redraw facility is a feature within your home loan itself, not a separate account. It allows you to withdraw any additional repayments you’ve made toward your loan.
Unlike an offset account, which exists independently, a redraw facility is integrated into your loan structure.
How Does Redraw Work?
You can make extra repayments toward your home loan.
If you need those funds later (for emergencies or other purposes), you can “redraw” them from your loan.
Redraw typically doesn’t allow access to minimum repayment amounts; it’s for additional contributions.
Considerations for Redraw
Processing Time: Redraw requests may take a day or two to process, unlike instant access with offset accounts.
Fees: Some lenders charge fees for using the redraw facility.
Minimum Amounts: There may be minimum redraw amounts or limits on withdrawal frequency.
Choosing the Right Option
Factors to Consider
Your Goals: Evaluate whether you prioritize interest savings or immediate access to funds.
Lender Policies: Check if your lender offers 100% offset accounts and any associated fees.
Loan Type: Both options work with variable rate loans, but offset accounts can also be linked to fixed-rate loans.
Key Takeouts
In summary, an offset account provides flexibility and interest savings, while a redraw facility allows you to tap into extra repayments when needed. Assess your financial goals and choose the option that aligns best with your needs.
By understanding the differences between offset accounts and redraw facilities, you can optimise your mortgage strategy align with your financial objectives and personal circumstances.
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