We're all looking for ways to save on our home loan, right? Well, did you know that there are many ways you can pay off your home loan faster? Two popular strategies are the use of an offset account and a redraw facility. These seem similar at first glance but offer different benefits and disadvantages. So, let's find out what they are.
What is an offset account?
An offset account allows you to use your savings to offset the interest on your home loan. For instance, a loan balance of $200,000, with $35,000 in an offset account means you'll only pay interest on $165,000 of the loan balance. Basically, the more money you put in your offset account, the less interest you'll pay on your home loan. Another benefit of having an offset account is that you can still access the funds in your offset account if you wish to do so.
What is a redraw facility?
A redraw on the other hand, allows you to access any additional repayments you've made above the required minimum mortgage payment. This offers flexibility, as you can redraw any additional money you have paid towards your mortgage, depending on the conditions of the redraw facility.
Similarities:
Both an offset and redraw offer the opportunity to reduce your interest gathered over the term of your home loan. An offset account does this by directing the money in the savings account towards your home loan while a redraw uses any additional funds paid towards your home loan to reduce interest gathered.
Simply put, both offset and redraw offer features to reduce the amount of interest you1II pay on your home loan if more money is put in them upfront. This means they both provide you with an opportunity to pay off your mortgage quicker, potentially saving you thousands in interest.
Differences:
A major difference between the two is that while an offset account is accessible to you, the money in a redraw facility is money you have used to reduce the debt a lender has advanced you, meaning you can access it at the lender1s discretion. This is worth factoring into your decision depending on how often you intend to access funds from either.
Some lenders also require a minimum redraw limit and can also limit you to a certain number of redraws. While offset accounts are generally more flexible, ifs worth noting offset accounts can have slightly higher interest rates and don't accrue interest like a savings account typically would.
Which one is better?
It really depends on what you want out of your home loan, but both can help you pay less interest in the long run. An offset is handy if you need access to a savings account, whereas if you're able to pay extra on your monthly repayments, a redraw can be a beneficial option.
Something to consider is the tax implications of both options. If you have an investment property, an offset account may lower the income tax deduction you1re able to claim on it.
However, a redraw facility may cause this interest to be exempt from tax deduction. Ifs best to check with your accountant for the specifics surrounding your situation.
A redraw is useful if you want to restrict how much you're withdrawing. For instance, if you pay an additional $200 on your monthly repayments, you can request to redraw this money in an emergency or for a holiday. This money isn1t as accessible as it is in an offset account, meaning you1re less likely to make impulsive purchases using it.
An offset account is handy for those who can manage their money effectively and won't be tempted to spend additional savings placed in their savings account. Having salary paid into an offset account, for instance, can greatly reduce the amount of interest you have to pay, so long as you meet your repayments and are aware of any debts you have. These funds can still be used for day-to-day expenses, though the higher the amount in your account, the less interest you'll have to pay.
You can use both an offset account and redraw facility in your home loan at the same time. This can greatly reduce interest while diversifying your options.
If you're unsure of what your next steps should be, reach out to us to find out what solution is best for your circumstances.
