Offset accounts and redraw facilities work in similar ways; they both allow you to reduce the balance of your home loan, and therefore the interest charged, by applying extra money to your debt.
Redraw facilities allow you to deposit spare income into your home loan account, allowing you to redraw a sum equal to the extra repayment amounts in future. In the meantime, the extra money paid will lower the amount of interest charged while still giving you access to your money.
However, there may be restrictions on how much money can be withdrawn and when. “For redraw, it depends on whether the facility applies to a fixed-rate or variable loan,” Fabio De Castro, Director of Simplify Finance, says. “Most institutions only allow redraw from a variable-rate loan, or fixed-rate loan but with limited access.”
It is important to find out how a loan’s redraw facility works before taking it on, as the fees and restriction attached might outweigh the benefits of interest savings.
Deciding between an offset account and a redraw facility on your home loan largely depends on how accessible you need your extra money to be.
An offset account is a transaction account linked to an eligible home or investment loan. The money you have in this account could offset the amount you owe on that loan, and you’ll only be charged the interest on the difference.
“Let’s say you have $10,000 in your 100% offset account. Instead of paying interest on your $100,000 loan, you are only paying interest on the difference of $90,000,” Fabio says.
Offset accounts, like many savings accounts, can give you easy access to your funds but often come with account fees, however the fees may be worth the interest savings and the added flexibility when compared to redraw facilities.
Finding a loan that matches your needs is a lot easier with an expert on your side. Speak to our team at Simplify Finance to find a loan that matches your current needs and future plans.