If you want to pay off your home loan faster, a redraw facility or offset account could be the answer. We analyse the differences.
Offset accounts and redraw facilities both allow you to put money against the loan, but a redraw facility allows you to put money straight on the loan while an offset account allows you to put money against the loan indirectly.
A home loan with a redraw facility allows you to borrow money you’ve already repaid and is usually offered with variable interest rate loans. A redraw facility allows you to be flexible with how you repay the loan. If you have spare money in your savings, you can pay this onto the loan.
For example, your minimum monthly loan repayments are $500. If you pay $700 each month for a period of 6 months you’ll have paid an extra $1200 on top of what you had to pay. A redraw facility allows you to access that extra $1200 if you need to, though borrowers only do this in the case of an emergency.
What are the features of a redraw facility?
Money in a redraw facility will go straight against the loan. This will reduce the amount you pay in interest and help you pay off the loan quicker. However, many redraw facilities will come with additional fees for withdrawing and depositing money. The providers may charge these fees straight away or they may give you a few free redraws and deposits a month. There may also be restrictions on how much and how often you can redraw in any given period. Check the terms and conditions of your home loan contract for specific information about redraw restrictions.
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An offset account is a savings account that is linked to a loan. Any funds that are deposited into the savings account are "offset" against the loan. The lender then reduces the amount on which interest is calculated by the amount in your offset account. In other words, if you owe $300,000 on your home loan and you have $10,000 in your offset account your lender will only be charging you daily interest on $290,000.
What are the features of an offset account?
The offset account will allow you to reduce the amount of interest you pay. You do this by depositing money into the offset account. These accounts will usually have unlimited free withdrawals and deposits. However, to use the offset account effectively you will need a significant amount in your account.
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What are the benefits of an offset account?
The more you have in your offset account, the less you owe in interest and that means less for you to pay overall. The trick to getting the biggest benefits from these accounts is to keep as much money in them as possible.
There are a couple of ways to do this;
- Have your wages paid directly into your offset. By doing this for at least a few days (as long as you don’t withdraw it all at once) your balance will be fairly high. If you have any savings you should also think about moving them into your offset.
- Consider making all your purchases on a credit card. By paying for all your daily transactions with a credit card, you’re keeping your offset account balance as high as possible for the whole month. However, you must repay your credit card bill at the end of the month to avoid interest. It’s imperative you repay your bill on time, otherwise any savings or benefits you gain from your offset account will be wiped out by credit card interest.
You could save thousands of dollars in interest over the life of your loan.
Is a redraw facility or offset account better?
This depends on your personal and financial situation. Both types of home loan offer money saving benefits. Both give you the chance to save interest and repay your loan earlier. The main thing is to decide what you really want from the loan.
An offset account will be most beneficial those with a good enough income to keep the balance fairly high each month. If you’re only ever going to have $100 sitting in it you, won’t make much of a dent in your balance. If, on the other hand, you have a secure income and are comfortable using your credit card for day-to-day transactions, you can reduce your term by a substantial amount.
If you can make overpayments now and then and like the idea of an “emergency fund” running in the background you might be better suited to a redraw account. As long as you can make overpayments at least a few times a year then you will be making the most of this feature.
Think about your budget, your income and your long term financial goals. Both offset and redraw accounts have their benefits, so think about what you want and then compare various home loans until you get the best deal.