Both redraw facility and offset account can help reduce your loan interest charges. Let’s see how they differ and which one might best suit your needs.
How do Redraw Facility and Offset Account Work?
Redraw facility and offset account are both common variable home loan features. Generally variable home loans come with redraw facility, but not all variable home loans have offset accounts. And offset accounts generally have higher fees and rates. Both of them can offer borrowers flexibility and potential financial convenience. But how exactly do they work, and what are they used for?
Redraw facility is not a separate account. It is a feature attached to the loan that enables you to make additional repayments in addition to the monthly minimum loan payments. And only the extra payments can be withdrawn. You can use these extra funds if you need them for renovations or to cover unexpected expenses, but redrawing your money may not be flexible as some lenders may charge extra fees. Higher amount also may be subject to lender approval. And the redraw may not be real time transfer either. This is actually a pool of your extra payments placed above the balance in your home loan account.
Offset account is a separate transaction account, linked to your home loan with the same lender, but otherwise playing the role of a day-to-day account. You can use it as a bank account, with easy access to your funds. As you only need to pay interest on the balance that your home loan amount minus the offset account amount, the more money you keep in your offset account, the less interest you will pay.
How do Redraw Facility and Offset Account Reduce Interest?
Both the redraw facility and the offset account can reduce the interest charges on your home loan. Making additional repayments to your loan account or placing additional funds in an offset account can be used to calculate the outstanding balance of interest on your home loan. This means that keeping extra funds in the redraw facility or offset account, even for one day, will save money for you. If the minimum repayment is $1,500 per month, but you decide to pay $1,700, then an additional $200 will go into your redraw facility or offset account. This money will always work for you as long as you keep it in your account, and the money saved on interest can then be used to pay off the loan sooner in the future.
Choosing Redraw Facility or Offset Account?
Both the redraw facility and the offset account have their advantages, so it’s not that which is better, but which is better for your financial situation. In general, the loans with offset account have redraw facility, so you can also have both functions and make full use of them to save yourself some money.
Do you know some fixed loan products can also have offset accounts? Contact your professional mortgage brokers at MoreMore Finance to get more tips.
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