Home loans can come with a range of different rates, charges and features. As a borrower it can be difficult to fully grasp the real impacts of these differences. Two of the most common options that can come packaged with a home loan are:

1.  Offset Accounts

2.  Redraw Facilities

In fact, around 40% of all new home loans include these features. If you need help understanding the difference between the two, then read on.

What is an offset account?

Simply put an offset account is a different kind of transactional account that is related to your home loan balance. Day to day, offset accounts function like traditional savings or debit account. You can make deposits and withdrawals, set up direct debits, transfer money and make cash withdrawals at ATMS.

The difference is, the balance of the account is usually considered as “additional payments” off your home loan, so rather than paying interest on the outstanding principal, your interest is calculated on the principal less the balance in your offset account. Overtime this can add up to big savings for borrowers which is why so many people see this as a highly desirable feature of a home loan package.

What is a redraw facility?

A redraw facility is very different to an offset account. Essentially, a redraw facility allows you to make additional payments beyond your standard payment. The sum of the additional payments is used to lower you interest payments, however they can be redrawn on if necessary.  Many borrowers use this type of facility in a similar way to how they would use a savings account.

When saving for large purchases, such as a car, holiday or renovations, by putting the savings into an redraw account they will save on interest until they decide to draw funds out. The extra payments you make towards your home loan can be accessed at a time of your choosing; however they are not as easily accessible as the funds in an offset account. Some lenders have limitations on redraw facilities, such as delayed transfer of funds, or limitations on how many times per year you can redraw without penalty.

Which option is best?

There really is no right answer here, and it will depend on your current situation and your plans for the future. Some things you may wish to consider before choosing which option is right for you are:

1.  What are your plans around making additional repayments?

2.  How much per month can you afford to pay in addition to the minimum repayments?

3.  Do you have any plans for major spends in the next few years?

4.  How do you currently use your normal transaction account?

Both offset accounts and redraw facilities are beneficial when it comes to minimising the interest you pay on your home loan. However, choosing the right option is highly dependant on a number of key factors. If you are interested in finding out more about which solution is the best fit for you, then reach out to one of our expert mortgage consultants to discuss your situation and explore your options. 

Offset accounts and redraw facilities can help keep your day to day management of your finances flexible. Both options help you to pay off your loan sooner by decreasing the amount of interest you may over time. That said, you will only see the benefits of both types of account if you have a reasonably high level of additional payments, or savings in the bank.

Paying off your home loan sooner is a goal for many homeowners. With smart and flexible facilities like these, you can structure your accounts in a way that will have minimal impact on your day to day spending, whilst reaping the rewards for parking your savings in an account that is going to bring down your assessable principal balance.

That being said, it is important to note that the fees and charges for both offset accounts and redraw facilities vary by lender. To find out more about the options available, contact us today for an obligation free consultation. Our mortgage experts are continually reviewing the market for home loan packages and we can help you find solutions for your personal situation. 

Bernie Kyne
Mortgage Consultant
0400141757
bernie.kyne@mortgage-express.com.au