Offset Accounts vs. Redraw Facilities
When selecting a home loan, lenders and interest rates are generally our first thoughts. But what about the specific features that differ between loans?
Loans should be tailored to suit personal circumstances and future financial goals, so any beneficial attributes like offset accounts and redraw facilities should always be evaluated and utilised.
Although quite similar, the operational nature of each is relatively different.
Let’s take a look at these two terms in a broader sense discussing what they are and how they benefit mortgage holders in different ways.
What is an Offset Account?
Put simply, an offset account is a savings account that works in collaboration with your home loan. These 100% offset accounts allow the holder to as if earn interest at the exact same rate as the home loan, thus offsetting the interest payable on the home loan. The offset’s principal is still accessible to the holder similar to a normal daily savings account.
The primary advantage of an offset account is that the funds are yours to use as you please while reducing the interest payable on your loan. These funds are usually guaranteed by the government for up to $250,000 and do not affect the tax deductibility of the loan.
Example: Your home loan is $500,000. You have deposited $100,000 into your offset account. This means you are now only paying interest on the $400,000 balance.
What is a Redraw Facility?
Setting up a redraw facility means additional funds can be deposited directly into your home loan account, reducing the interest payable, with the ability to redraw those funds, providing they exceed the repayment amount for the loan, at your convenience (although minimum withdrawal amount and/or withdrawal fees may apply).
Some lenders will offer loans with a redraw facility, while others will offer an offset account option. Loans with a redraw facility generally attract a lower interest rate than those with an offset account.
Example: Your home loan is $500,000. You have deposited, on top of the usual repayments, $100,000 into the loan account. This means you are now only paying interest on the $400,000 balance.
Is one of these features more beneficial than the other?
Offset accounts and redraw facilities may both benefit borrowers. However, there are key differences that provide advantages depending on your needs, lifestyle and goals.
Key Advantages of an Offset Account
- The funds remain yours to use as you please without affecting tax deductibility of the loan
- Funds are usually guaranteed by the government (up to $250,000)
Key Disadvantages of an Offset Account
- Usually attracts a higher interest rate on your loan
- Many loans don’t have this feature – reducing your choices
Key Advantages of a Redraw Facility
- Most variable loans come with a redraw facility as default.
- May be the best place to park your savings until needed
Key Disadvantages of a Redraw Facility
- Various redrawing limits may apply
- Funds deposited become part of the loan which affects deductibility if redrawn for mixed use (i.e. personal/investment)
It may not be easy to evaluate loan options on your own, so it is most likely prudent to seek the advice of a professional to match-make the right loan to suit your situation and goals.
Contact Ethan to discuss your mortgage options.