When it comes to paying off a mortgage, two popular options are the redraw facility and offset account. Both options offer unique benefits to borrowers but have some essential differences that can impact your overall financial strategy
What is a Redraw Facility?
A redraw facility is a feature that allows borrowers to withdraw extra repayments made towards their home loan. Unlike an offset account, a redraw facility is not a separate bank account but a feature within the home loan.
Generally, a redraw facility only allows borrowers to access funds in excess of the minimum repayment amount. For example, if you make an extra $10,000 on your mortgage, you could redraw that $10,000 later if you need it for renovation or other expenses.
Additionally, a redraw facility can be a good option for people who need flexibility in their budget. If you have extra money one month, you can make an additional payment on your mortgage and then redraw that money if you need it later.
Some lenders may have conditions or fees associated with redrawing funds, so it’s important to review the terms and conditions of your loan carefully before making any extra payments or accessing your redraw facility
What is an Offset Account?
An offset account is a transaction linked to a customer’s home loan with the same financial institution. It functions as an everyday account, allowing customers to deposit or withdraw funds and purchase using a debit card.
An offset account benefits borrowers looking to reduce the interest charged on their home loan while still having access to their funds. For example, if you have a $300,000 mortgage and $50,000 in your offset account, you would only pay interest on $250,000 of your loan.
One of the main benefits of an offset account is that it can help you pay off your mortgage faster. By reducing the interest you pay, you can put more money towards the principal amount of your loan and pay it off faster. Additionally, because an offset account is separate, you have easy access to your money if you need it for other expenses.
Which One is Better?
The choice between an offset account and a redraw facility largely depends on personal circumstances and financial goals. An offset account may be a better option if the goal is to reduce interest while retaining regular access to cash. If the goal is to repay the loan faster, a redraw facility may be a better option.
Redraw facilities and offset accounts offer benefits and drawbacks, so which option is best for you depends on your financial situation and goals. Here are some factors to consider:
Flexibility
If you need flexibility in your budget and want to make extra payments and redraw funds if required, a redraw facility may be the best option.
Interest savings
If you want to save on interest payments and pay off your mortgage faster, an offset account may be the better choice.
Fees and charges
Consider the fees and charges associated with each option, including any fees for making extra payments or maintaining an offset account.
Lender policies
Some lenders may have stricter policies around redraw facilities or offset accounts, so it’s important to research and compare different lenders before deciding.
