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Offset accounts and redraw facilities are both common home loan features.
They provide similar benefits but operate differently. Both options allow you to use any extra
income or savings to reduce the balance of your loan, thereby reducing your interest repayments.
An offset account is just like an everyday bank account, except it is linked to your home loan. Your
salary can be deposited into the account and direct debits can be established to pay your regular
accounts. Your offset account will come with a debit card which you can use to make everyday
purchases.
The major benefit of using an offset account is the balance will offset daily against the home loan
principal, reducing the amount of interest you pay. For instance, if a borrower has a $400,000 home
loan and $50,000 in a 100% offset account, they will be charged interest on the combined balance of
$350,000.
In choosing an offset account it is important to ensure the lender is offering a 100% offset as some
only offer partial offsets which limits the interest reduction. AN offset account is generally
considered as a premium feature and may come with a monthly or annual fee.
A redraw facility allows borrowers to make additional deposits in their mortgage accounts. Those
deposits are offset against the balance of the home loan, reducing monthly interest calculations.
Money in a redraw can with withdrawn but is usually not available for immediate access as the
money needs to transfer from the mortgage to an everyday account.
There may be a minimum redraw amount and there may be a limit on how many redraws you can
make in a year. Most redraw facilities are free however there are some which charge a fee for
redrawing.
The advantage of a redraw facility is that the money is going into the home loan account and
reduces the interest cost on the home loan, while providing day-to-day access to the cash for
transaction. It is better suited top people whose priority is to focus on paying off their mortgages.
Offset account
Pros:
Reduces the interest you pay and reduces the life of your loan
Redraw on the amount in the offset account without incurring a fee
Cons:
A fee or higher mortgage interest rate may be charged for having the offset facility included
in your home loan package
May not be effective for those who are not good at managing a budget.
Unlikely to be available on a fixed rate loan.
Redraw facility
Pros:
Reduces the interest you pay and reduces the life of your loan
Can be available with fixed rate loans
A good solution for those who do not wish to have immediate access to their savings.
Cons:
May be charged a fee for dipping into extra repayments you’ve made
Less flexible, as you may have a minimum on how much you can redraw or need to wait for
money to transfer between the mortgage and everyday bank account.
Summary
For borrowers to get value out of an offset that charges a fee, they would need to evaluate how
much they should hold in their offset account to compensate for any fees and determine whether it
is viable.
Your Mortgage & Finance Brokers recommendation is a great place to start when choosing an offset
or redraw facility and needs to be considered in conjunction with interest rates, fees and an existing
financial relationship
So what does this mean for you?
When the major banks hike their variable rates, other lenders tend to follow suit. It means that no
matter which lender you're with, there are no guarantees that you won’t face higher home loan
repayments.
There is a solution
Here are three key facts you need to know.
1. You don’t have to just wear a higher rate.
2. The home loan market is very competitive and many lenders are happy to offer a good deal
to entice new customers.
3. Loyalty to a particular lender won't serve you. When big banks lift their home loan rates
independent of the RBA, they work on the assumption that home owners will just accept
higher repayments rather than take action to get a better deal1
.
Let's work together to help you beat rising home loan rates!
Act now
Now's the time to give us a call. We can help you:
understand how much your monthly repayments have risen by
check if your home loan is still competitive
work out if you could secure a better deal to meet your objectives
put strategies in place to help you manage a higher home loan rate
Not all lenders have increased rates. Don't wait to find out that your lender has jumped on the
bandwagon of higher rates. Give us a call today.
The sooner you act, the sooner you can have a strategy in place to chart a course through higher
interest rates.
The content of this newsletter is written expressly for education purposes and is based on the opinions of the authors. The authors and
agents for the authors are unable to accept any liability or responsibility whatsoever to any error or omission or any loss or damage of any
kind sustained by a person or entity arising from the use of this information. It is recommended that you seek professional advice relevant
to your specific circumstances before acting on the information based in this document.
A cool-season favourite, peas are great whether they are eaten raw or cooked. Add these tasty and versatile fritters to your as the ultimate winter treat.
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