Getting the most out of redraw facilities and offset accounts
Redraw facilities and offset accounts are two common features you’ll encounter in the mortgage hopping process.
Both features can save you money, but only if you use them to their full potential. In this guide, we’ll explain what redraw facilities and offset accounts are, who they might be suitable for and how you can get the most out of them.
- Redraw facilities allow you to make additional repayments on a loan, then withdraw them later if you need extra spending money.
- Offset accounts are transactional accounts linked to your home loan. The balance in these accounts comes off of the principal of your loan, reducing your interest payments.
- Both redraw facilities and offset accounts can save you money if you use them to their full potential.
- It’s important to ensure that any home loan feature ends up saving you more money than you pay. For example, some features may sound attractive but come with additional fees, so it’s always best to check whether the feature will end up saving you money.
- A qualified mortgage adviser can help you identify if redraw facilities or offset accounts are right for your situation.
Extra Repayments and Redraw Facilities
To understand what redraw facilities allow you to do, you first need to understand how extra repayments work.
In practice, they’re quite simple. Extra repayments allow you to make additional payments on your home loan (i.e. more than the agreed-upon amount you pay your lender each month).
Almost all variable rate mortgages allow you to make unlimited additional repayments. In theory, if you come into a windfall of cash, you can pay off your mortgage years before the term ends.
Fixed rate loans are often more restricted. Some lenders allow you to make extra repayments up to a limit, while other lenders don’t let you make any additional repayments during the fixed period of the loan.
Making extra repayments will reduce the amount of interest you pay over the course of your term, allowing you to chip away at the loan principal quicker. Most of the home loan interest is front-loaded, which means you pay this off at the beginning before getting to the principal of the loan.
Making regular extra repayments will reduce the loan term along with the amount of money you pay in interest. It may also fast-track the amount of equity you earn in your home.
What is a Redraw Facility?
So, you’ve made extra repayments on your home loan. You may have paid a couple hundred extra dollars on each mortgage payment for a year or so.
Redraw facilities are a feature of most variable rate home loans that allow you to withdraw the extra repayments you’ve made.
We all know life is unpredictable. You can only plan so much. You’ll never know when your car will need a repair, the roof of your home will get damaged in a storm, or a surprise diagnosis requires extra funds.
Suddenly, you need those extra funds you put towards your mortgage. You may even see an opportunity to improve your home and—in turn—increase its value and earn more equity. For all of these circumstances, you may need to access the extra repayments you made towards your loan.
Redraw facilities allow you to do this.
Almost all lenders now offer an easy way to use a redraw facility, whether that’s through online transactions or with the help of a traditional ATM.
Of course, there are some exceptions here. Most lenders restrict or prevent redraw facilities on fixed rate loans. In these cases, you’ll have to wait until the fixed period ends before you can access any additional repayments you were allowed to make on the loan.
Some lenders will also charge fees for using the redraw facility. It’s important to look at the terms of the loan in this regard before deciding on the best course of action.
So, what’s the difference between a redraw facility and offset account? If you’re confused, that’s completely understandable, as both features allow you to reduce the amount of interest you pay on your home loan.
Apart from that, redraw facilities and offset accounts are quite different. Many lenders now offer both features, though, so you don’t have to choose one over the other.
An offset account is a transactional account that is linked to your home loan. In short, the balance you carry in this account will determine how much money you save in interest.
The higher the balance in your offset account, the more money that is deducted from your principal. The more money deducted from your principal, the less you pay in interest.
Offset accounts can be incredibly useful, but not all banks offer the same features. While some lenders provide a 100% offset account, others will only offer 50% or 75% offset accounts. This means that only a percentage of your balance will be offset against the principal. In other words, if you have a 50% offset account, and a balance of $50,000, only $25,000 of your principal will not incur interest.
As is the case with redraw facilities, lenders often limit or prevent offset accounts during the fixed period of your loan.
Redraw Facility Vs. Offset Account
Redraw facilities and offset accounts will save money in certain circumstances, but not all of them.
Offset accounts, in particular, will depend on whether or not you fully utilise the feature. It’s important to note that loans with offset accounts may also come with higher interest rates and fees. If you don’t keep enough money in the account, you might end up spending more in the long-run than you save.
Most loans with a redraw facility don’t have a higher interest rate. You can make extra repayments and withdraw your funds without paying more if you don’t use the feature. You do have to be wary of things like account keeping fees and transactional fees when you redraw, however.
Offset accounts are best for people who want to have enough money to keep in the account and even add to it over time. It’s not great for those who have a hard time saving as it can end up costing more than you save.
Redraw facilities are great for people who want extra peace of mind in unpredictable circumstances. They allow you to make extra repayments which is great for paying off your loan quicker and reducing interest, and they also provide the ability to access those funds in times of need. For example, if you have unexpected medical fees or want to increase your home’s value through renovations. This flexibility can be really helpful and reassuring. Just remember that there can be additional fees involved and restrictions in how many times you can redraw funds in a set period.
As always, it’s important to weigh up the pros and cons of each feature, and ensure that they’re worth having in your situation. After all, you want to end up saving more than you pay. A qualified mortgage broker can help you identify whether you’ll end up benefiting from features like redraw facilities and offset accounts.
Find out how we can help you identify a home loan with the right features for your unique situation.