- Posted 11 Jan
- 0 Comments
So you’ve found the perfect home for you and your family, congratulations! You’ve got a solid deposit and you’re all set to sign the dotted line on your home loan.
Only, there are some features that you’re not too sure about, such as an offset account and a redraw facility. You’re not sure if you need either of these and to be honest, you’re not even sure what they are!
Before you sign on the dotted line, understand the facilities available to you in different types of loans; allowing you to make the best decision for you and your family.
What is an Offset Account?
According to research recently conducted, 34% of lenders offer an offset account on fixed-rate home loans, so it’s important that you understand what that actually means.
If you’re offered an offset account, it means that your transaction account will be linked to your home loan. This offset account will have normal transactional account functions as well.
The benefit of it being linked to your home loan is that the money that resides in your offset account is offset daily against your home loan balance, allowing the mortgage interest charged to be reduced.
What is a Redraw Facility or Account?
Comparatively, you’ll find that most lenders will offer a redraw facility on a fixed-rate home loan.
This type of facility enables you to withdraw any money that you’ve already contributed to paying off your home loan. Any remaining balance in your redraw account consists of whatever extra payments you’ve made toward the mortgage.
What’s the Difference Between an Offset Account and a Redraw Facility?
In some ways, these accounts are similar, with the main difference being that any money sitting in your offset account remains easily accessible, just like any normal transactional account, whereas the money sitting in a redraw account, while still relatively accessible, you can’t get it on the same day.
There are likely to be fees associated with redrawing money using a redraw facility, so this is not an account you’d want to try to use for everyday expenses.
Which Facility is Best?
Either account will benefit a borrower, but it largely depends on what you are trying to achieve with your mortgage.
If you’re a diligent saver, you’ll benefit from either account.
What are you looking to achieve with your mortgage? Are you looking to reduce interest on your loan on a daily basis or are you looking to pay off the loan (your principal amount) faster?
If you want to reduce the amount of interest you pay daily on your loan, then an offset account is your best option. You’ll be able to have day-to-day access to your cash while reducing the interest you’ll pay on your home loan.
If you want to pay off your loan principal faster, then having a redraw facility as part of your home loan will allow you to pay money directly into your loan, reducing your principal faster.
Whatever facility you decide to use, any extra money that you can pay into your mortgage will save you money over the life of your home loan.
If you need help deciding on which facilities and functions you need in your home loan, contact our team at Australian Credit and Finance today.