Offset account versus redraw – saving for a rainy day

Even though interest rates are at an all-time low, who wants to pay any more than they have to?
Many homeowners feel unsure as to whether they should have an offset account or a redraw facility. In many ways they are quite similar as they both reduce the overall interest you pay on your home loan and even reduce the term of your loan too. Now that’s good news!

Let’s take a look at these together and then you can decide which option suits your requirements.

Let’s firstly take a look at a mortgage redraw

If you have been making additional payments on your mortgage, a redraw facility allows you to access the additional repayments you have made. Making additional payments can be a very effective way to minimise the interest you pay over the life of the loan while knowing you have access to these additional payments for larger purchases or a holiday.

Pros:

• Reduces the amount of interest you pay and therefore can reduce the term of your loan.
• You are also reducing the principal balance ahead of time.

Cons:

• Availability of funds may take up to 24 hours if you do not have a debit card facility to access your surplus funds.

Offset account
An offset account is a regular transaction account that operates in conjunction with your home loan. Whatever funds you have in the account “offsets” the interest charged on your mortgage. For example, if you have $10,000 sitting in your offset account and your mortgage balance is $200,000 the interest will be charged on $190,000. Some lenders allow multiple offset accounts to be set up enabling you to have accounts for “bills” and “holidays” and perhaps a “mojo” account for something on your wish list. Any money deposited into these accounts will offset the amount of interest accrued.

A very effective way to maximise the amount available to offset the interest payable on your mortgage is to have all your salary deposited into the offset account and use your credit card for all your purchases. Each month, pay your credit card in full and avoid having any monthly interest charges. It is important to note that you do need to have good discipline with your spending habits for this to work well.
Generally to have this type of facility available, a lender will charge either an annual package fee or a monthly account keeping fee.

Pros:

• Reduces the amount of interest you pay and therefore can reduce the term of your loan.
• You have immediate access to funds in your offset account with a debit card.

Cons:

• You are not actually reducing the principal of your mortgage.
• Fees are applicable, either an annual fee or a monthly fee.
• Interest rates can often be higher than a no frills loan product.

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