Offset vs. Redraw
If you’ve had a home loan, you’ve researched online, or perhaps been given some great backyard BBQ advice from Uncle Bob, it’s likely you’ve heard of an Offset and maybe even Redraw. Whilst you may be familiar with the terms, it’s less common to fully understand how they work and the pros and cons of Redraw versus Offset.
We explore both options and help you understand the pros and cons of each!
REDRAW FACILITY
A redraw facility allows you to transfer funds out of your loan if you are ahead on your repayments.
For example, if your minimum repayment is $2,000 per month and you pay $2,500 per month then your redraw will grow by $500 per month. You can transfer that money into your transaction account to spend as you like.
Pros:
- Available on most variable loans (and rarely on fixed loans)
- Allows you to access funds that you have paid to your loan
- Usually fee free via internet banking
- Saves you interest as your loan balance is lowered by your redraw
Cons:
- When you redraw, you lose the head start you gave yourself by paying extra
- Ease of access to redraw can be too tempting
- While it’s rare, banks can legally block your access to your redraw in some circumstances
OFFSET ACCOUNT
An Offset Account is a transactional account linked to your home loan, allowing the balance of the Offset to be deducted from the loan balance when calculating your interest.
For example; Your loan account is $300,000 and you have $100,000 in your Offset Account. You will only pay interest on $200,000, rather than the full balance.
Pros:
- A separate account with full transactional access, you can have a card and have your wage deposited
- Can save you interest as your interest is calculated on your loan balance minus the offset balance
- Easy access to funds and flexibility in how you use it
Cons:
- Can attract higher interest rates and fees to have an Offset facility
- Easy access to savings can be hard to keep track of your spending
- Not commonly offered on fixed rate loans
SO, REDRAW VS OFFSET, WHICH ONE IS BETTER?
Both options have the potential to reduce the interest you pay, and both of them can allow you to pay off your loan quicker if used wisely.
When we determine which option is right for you we consider your values, your current financial position as well as your future goals.
Making the wrong move could be costly, which is why we always recommend you seek guidance from an expert Mortgage Broker that can provide you with holistic advice.
