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28 June 2018

Redraw Facilities vs Offset Accounts

Redraw Facilities vs Offset Accounts - advice from mortgage broker Gokee Arora

First Home Buyer

As a first home buyer, getting your head around all the different loan products and features can be tricky. In this article, we explain two of the key features you’ll want to know about when choosing your home loan – redraw facilities and offset accounts. These gems can help you manage your cash, potentially save on interest and pay off your home loan sooner. Best of all – you can use both, or either to help save and manage your money!

Redraw Facilities

A redraw facility can be attached to your home loan and allows you to contribute extra money towards you mortgage, then draw it back if needed. You can choose to make regular repayments above the minimum requirement or throw in the occasional lump sum. Any excess funds you contribute will reduce the balance of your loan and the amount of interest you pay.

Redraw facilities are a popular option for homeowners as they can help you to actively save, pay less in interest over the life of the loan, and potentially cut down on the time it takes to repay the mortgage. If you think you may have additional funds to contribute to your home loan, a redraw could be worthwhile.

       The Pros:

  • Redraw facilities can be an excellent savings tool. Actively save without locking up your funds indefinitely
  • You’ll have an extra pool of cash at your disposal should you need it in the future. However, in the meantime, your money’s working to your advantage by reducing the amount of interest you’ll pay on your home loan
  • By making extra repayments, you’ll not only reduce the interest you pay, you’ll potentially pay off your home loan sooner. Over time, the financial savings can be substantial.

       The Cons:

  • There may be withdrawal restrictions, for example with some lenders you may only be able to make a certain number of redraws a year. You may also have to apply in advance to access your money.
  • You may be up for additional fees, such as a flat redraw activation fee, or fees per withdrawal. Speak to us and we’ll explain any costs involved. If you think you may make regular withdrawals, we can point you in the direction of lenders with unlimited, free redraws.
  • There may a minimum redraw amount (for example, $500) or a maximum redraw amount.

Offset Accounts

An offset account is a transaction account that’s linked to your home loan. The money you have in this account is offset against your loan balance. In other words, you can reduce the amount of interest you pay on your mortgage and potentially pay off your loan faster.

Still confused? Here’s an example of an offset account in action. Say you have a $400,000 home loan and you deposit $20,000 into your offset account. Your lender will the charge interest on $380,000 instead of the whole loan amount. You’ll reap the rewards as long as that $20,000 sits in your offset account.

       The Pros:

  • You can potentially save thousands of dollars in interest and cut years off the term of your loan
  • Your money is working harder for you in an offset account than it otherwise would in a regular savings account. How? By saving you interest on your loan!
  • You won’t be stung with a tax bill for the interest you save with your offset account. Interest earned on a savings account may, on the other hand, be subject to tax.
  • Borrowers can access their money freely and treat their offset account as a normal transaction account. Simply deposit your pay in there and pay bills as required or use it more as a savings account – the choice is yours.
  • Offset accounts often come with ATM access, online banking and a credit card.

       The Cons:

  • There may be additional costs for an offset account, such as a monthly fee or an annual package fee. We can explain whether the costs are worth the savings you’ll make in your situation, so talk with us.
  • As these accounts come with ATM access and card facilities, there is a greater potential for fraudulent transactions compared to redraw facilities

As you can see, when used correctly, both redraw facilities and offset accounts can be invaluable tools for helping you get ahead financially. If you’d like to find out more about which option may work best for you, please give us a call. We’re happy to answer any questions you may have and help you work out what’s right for you. We may even recommend going for both options – that is, keeping your spending money if an offset account, and tucking funds you’re unlikely to need into a mortgage with a redraw facility. Please get in touch today!

Gokee Arora
Mortgage Broker
iConnect Financial Alexandria

Gokee is available at gokee.arora@iconnectfinancial.com.au or by phone on 0424 952 673. You can also check out iConnect Financial here.

 

Subject to lenders terms and conditions, fee and charges and eligibility criteria apply.

This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances. Your full financial situation will need to be reviewed prior to acceptance of any offer or product. This article does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.

  


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