Offset and redraw facilities – What are they and how can they help?

 

Offset accounts and redraw facilities are loan features that allow you to use surplus income or savings to reduce your loan balance and thereby reduce the amount of interest you pay on your loan.  So, how do they work?

Offset Accounts

An offset account is essentially a savings or transaction account that is linked to your loan account.  When your bank or lender calculates interest on your loan, the balance in the offset account is deducted from the loan balance, and interest is then calculated on the reduced loan balance.

Imagine you have $10,000 in your offset account which is linked to your home loan account with a balance of $400,000.  Your loan account attracts an interest rate of 4.5% pa.  When your lender calculates the interest payable, they will apply the interest rate to $390,000 instead of $400,000.

Obviously, the higher the balance in your offset account, the greater the savings and the sooner you will pay off your mortgage.  You can maximise your offset account by having your salary and any other income you earn credited directly to your offset account.  By setting and maintaining a realistic budget, you can maximise your savings whilst reducing the interest paid on your home loan.

Offset accounts are ideal where you need ready access to your savings and the flexibility of a transactional account.

Redraw Facility

Your bank or lender will require that you make a minimum monthly repayment to your home loan account.  That minimum repayment is based on the loan amount, interest rate, and agreed term of the loan.  The minimum repayment is calculated to ensure that you will have repaid the loan in full by the end of the term.

If you can pay more than the minimum repayment, then obviously, you will pay your loan off sooner.  If you have a redraw facility attached to your loan, this will also mean that you will have surplus funds available to redraw for another use should the need arise.

You should be aware however, that charges as well as restrictions on how much money can be withdrawn and at what times may apply. It is important to consider whether the potential interest savings outweigh the possible fees and restrictions before taking on a redraw facility.

A redraw facility may be preferable to an offset account if you struggle to maintain and manage a budget and need a helping hand with financial discipline.  The facility allows you access to the money, but it’s not quite at your fingertips like it is with an offset account.

If you would like to know more about offset accounts and redraw facilities and how they can help save money on your home loan, get in touch with one of our brokers today for a complimentary chat to discuss what is right for your personal situation.