Offset Accounts Verses Redraw Facilities
You’ve just bought a new home. It’s the start of a whole new chapter in your life and you want to be smart about this huge investment you’ve made in both yourself and your family. You want to make sure you are making choices that both work best for your situation while also ensuring your money is working it’s hardest. So you decide to look into both an Offset account and a Redraw facility to determine if one of these options may be right for you. The only problem is, you’re not quite sure what each of them are and how they compare.
Let’s start with Offset accounts. This is an account which works much the same as a regular savings/everyday account, allowing you to make regular withdraws, purchases, etc whenever you need. The difference is, the amount of money in this account affects how much interest you pay on your home. So for example, if your home loanis $500,000 and you put $20,000 into your offset account, you will only be charged interest on $480,000 of your home loan. This in turn can end up saving you thousands of dollars in interest fees during the life of your home loan and even enable you to pay off your home lone faster, as more of your monthly payments will being going to bringing down the balance as opposed to paying off interest fees.
A Redraw facility on the other hand, works a bit more like building equity in your home. Essentially, you are paying extra on top your mortgage, and the extra goes into your Redraw facility which you can either put towards paying off your mortgage as a whole or use as a type of savings account. In this case you would be able to access your funds when required via your Redraw facility manager, usually for a fee.
The benefit to this is, if a situation arises where you need extra funds (say a car breaks down, there are unexpected medical bills or you just really need a vacation), you have them available to you. However, you don’t have daily access to these accounts like you do with an Offset account, so the temptation to spend decreases. Additionally, as you put more into your Redraw facility, the interest you pay on your home loan as a whole decrease.
So for example, say you buy your home for $400,000 and your home mortgage is $1,800 a month. You decide to pay $2,100 a month and have the extra $300 a month you are paying go to your Redraw facility. After doing this for five years you’ve built up $18,000. You are now paying interest on what is left of your mortgage minus the $18,000. Plus you have $18,000 available to you if you need it.
The Major Difference
That said, the big difference between a redraw facility versus an Offset account is accessibility of payments. If you are a good saver on your own, the appeal of an Offset account might be greater. If you’d rather the money just be out of sight and out of mind until needed a Redraw facility might be a better rout.
In both cases however, it is important that you look at the fees and terms associated with each.
The goal is to make your money work best for you. In most cases, both Offset accounts and Redraw facilities will do this, as you will be saving more in interest on your home loan than you would be making off of interest earned from a savings account. Still, your finance consultant should run the numbers with you to ensure you are entering into the situation that works best for you, your family and your money.