Want to pay off your home loan sooner and save thousands of dollars in interest? An offset account or redraw facility could help you do just that.
But how do offset and redraw work? And what’s the difference between them?
A mortgage offset account is a transaction account linked to your home loan account. It can help you pay less interest on your home loan. That’s because the money you save in the account is offset daily against your loan balance.
For example, if your loan is $800,000 and you have $50,000 in your offset account, you will be charged interest only on $750,000.
While most offset accounts offset your loan balance in full, some offer only a partial offset. The full offset option is generally seen with variable loans; the partial with fixed loans.
A redraw facility is similar to an offset account in that it helps you reduce your interest bill. Again, if your loan is $800,000 and you have $50,000 in your redraw facility, you will be charged interest only on $750,000.
The deposits you make into your redraw facility are regarded as extra repayments on your mortgage, which allows you to get ahead on your mortgage and pay it off sooner. But you also have the option to redraw or ‘borrow back’ these extra repayments in the future if you need the money.
Keep in mind, lenders typically have restrictions on withdrawals and may charge fees. There may also be tax consequences to redrawing money.
An offset account is a separate account that is linked to your loan account. A redraw facility, though, is not separate from your loan account ‒ it sits within the account.
Why does that matter? Two reasons.
First, with an offset account, you can deposit and withdraw money as often as you like at no extra cost; indeed, you can even connect it to a debit card to make it a fully operational transaction account. However, with a redraw facility, fees and restrictions might apply.
Second, when you take money out of an offset account, you’re withdrawing your own money. But when you take money out of a redraw facility, you’re technically borrowing the lender’s money (as this was money you’d already repaid to the lender). That can have tax consequences.
There’s no one answer to this question, as it depends on your individual circumstances. Your Shore Financial broker can help you weigh up the pros and cons of each option.
Some loan products offer both offset and redraw, which means you don’t have to choose.
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