Offset VS Redraw - Jessica Arabia, Finance Prospects

April 29, 2019

 

We’ve have had an increase in clients coming to see me and asking if they can have an offset in their home loan. When I ask why, I get the same response – I am not sure but my friend or family member has one so I want one too. Most clients who request one do not yet understand what the purpose of one is, so I educate them before they make their final decision.

 

What’s the difference?

 

 

A Redraw Facility

A redraw facility is a product that lets you access extra repayments you have made on your home loan and is included in your mortgage, typically there are no fees for redrawing your money but there may be a limit to how much you can redraw.

It is a non-transactional account, which simply means you have to log onto your internet banking or phone banking and transfer your redraw money into a nominated account to access it.

If you redraw at the branch, there may be a fee applicable. Redraw facilities may come with restrictions and this will vary with each lender. Any extra money you have you can transfer straight to your redraw account.

 

An Offset Account

An offset account is a part of a packaged home loan which incurs a fee of $395 per year which also gives your access to a credit card. An offset account is a transaction account which means you will have a card attached to it and you can access your money at any time using an ATM.

Your salary can be deposited into the offset account and you can use your offset as your everyday account. Another benefit is that any interest earned on your balance in your offset account will be automatically deposited into your home loan account, reducing your balance.

100% offset accounts are the most attractive option, as these accounts earn interest equal to the interest you’re paying on your home loan. If you home loan is fixed there are some lenders that offer partial offsets of about 40%, generally an offset benefit is limited when your home loan is fixed.

Both of these features will allow you to pay in extra funds to reduce your home loan balance and reduce the amount of interest you pay.

For many home owners it will not make a huge difference either way but for clients looking for a set and forget loan or those clients who need more discipline when saving money,  an offset facility is less suitable. These clients may be tempted to dip into their savings if it is readily available in an offset.

 

If you would like to know more about this topic please feel free to contact Jessica Arabia on 0415 773 178 or jessica@financeprospects.com.au