For a long time, you may have been thinking about how to pay off your mortgage quicker, Right? Then you should know everything about the facilities, like offset account & redraw facility, to manage your mortgage repayments wisely.
Redraw is a facility banks often offer with variable home loan and personal loan options. With this, you can withdraw money from your home or personal loan for your personal needs if you have made extra interest repayments.
However, an offset account is an account linked to your home loan, which helps you reduce your repayments. So how do both of these features work, what are their main considerations, and how can they help you pay off your mortgage faster? You may be thinking about all these questions, so here are all those answers.
How do Offset Account & Redraw Facility Work?
When you take a home loan, either with a fixed or variable interest rate, banks offer you an offset account. An offset account can be linked to your home or investment loan and allows you to reduce your repayments.
For example, you have taken a loan of $600,000 at an interest rate of 7% per annum for 20 years. Further, you have $30000 in your offset account. Your loan balance will be considered as $570,000 for calculating the interest, meaning you won’t have to pay interest on the entire $600,000. The reduction will improve your savings, and you may end up paying off your mortgage much before 30 years.
Additionally, maintaining multiple offset accounts can further reduce the loan amount required for interest payments. For instance, creating more offset accounts of $15,000 and $10,000 will reduce your loan amount to $545,000.
However, you can also make extra monthly or bulk home loan repayments ahead of scheduled ones into your loan. You can withdraw these extra repayments for any personal reason. This is what the redraw facility is. It usually becomes available only on variable home loans so that you can pay off the loan amount quickly.
Assume that with a variable-rate home loan, your monthly repayment is $1500, but you pay $2500, which exceeds the required amount. Suddenly, you want to buy a Television set and realise you’re $7,500 ahead in home loan repayments with no arrears. So, you can redraw $5,000 while keeping one scheduled repayment ahead on your home loan. This redraw money can be used to buy the television set.
Main Considerations While Maintaining Offset Account & Redraw Facility
Having offset account & redraw facility allows you to improve your savings while settling down your home loan quickly. However, you need to consider certain things with them, which are as follows:
With Offset Account
- Check interest savings: Firstly, check how much interest you can potentially save on your home loan depending on your loan amount, interest rate, term, and more. For this, you can use a loan repayment calculator.
- Maintain multiple offset accounts: If you keep multiple offset accounts, you can save your money extensively over your interest repayments subject to your home loan.
- Use the offset account for salary credit: It will be a good idea if you use your offset account to keep your salary and other deposits. This strategy will help you reduce your accrued interest on your home loan by multiple folds.
With A Redraw Facility
- Confirm your eligibility criteria: To use a redraw facility, you must fulfil your eligibility criteria. This will include that you should have a variable-rate home loan with at least one additional scheduled repayment ahead of your home loan. Additionally, you should want to access your redraw facility for personal use, and you should not have arrears in any of your accounts.
- Minimum redraw limit: You can only withdraw at least $500 to $150,000 per transaction and not less than that.
- Repayment balance: Keep your repayment balance ahead of your scheduled repayment after your redraw for a certain amount. If not maintained, you may need to pay higher repayment on your home loan within the loan time.
- Limited use of redraw: To clear out your mortgage soon, make less use of the redraw facility. This is because if you make more redraws, your home loan balance will increase with higher interest payments.
Eligibility Criteria For Having Offset Account & Redraw Facility
To effectively use offset account & redraw facility, you must meet the specified eligibility criteria.
Offset Account
- Loan Type: You should have taken a home loan either at a variable rate or a selected fixed rate. This is because most of the lenders only provide an offset account on variable-rate home loans. Most lenders only provide offset accounts with a Package on offer.
- Account Holder: The home loan must be in your name, only then can you open an offset account linked to it.
- Age Limit: You must be at least 18 years old to open an offset account linked to your home loan.
- Loan Eligibility Criteria: Not all lenders provide this facility, only a few are there. Further, some lenders also follow certain restrictions on various home loan products. So, confirm their eligibility criteria, and then only move further with an offset account.
- Minimum Loan Balance: Some lenders require a minimum outstanding loan balance for an offset account to be applicable. Therefore, make sure to check that requirement before having an offset account.
- Transaction Account Requirement: Some bank rules require an offset account to be used as a transaction account for deposits and withdrawals. You must check this requirement beforehand while applying for a variable-rate home loan.
Redraw Facility
- Loan Type: You should have taken a variable-rate home loan, then only you can redraw your money from your extra repayments.
- One extra scheduled repayment: To use the redraw facility, you must have one extra scheduled repayment ahead of your home loan.
- Personal Use Only: You only want access to the redraw facility for personal use, not for any other purposes.
- No Arrears in Any Account: You should not have arrears in any of your accounts, as it may prevent you from using your redraw facility.
- Lender-Specific Rules: Some lenders pursue additional rules associated with access to the redraw facility. So, you must know before applying for a redraw facility in any of the banks. You are not guaranteed access to redraw funds by all lenders.
Benefits of Having Offset Account & Redraw Facility
Now that you understand offset accounts, the redraw facility, their considerations, and eligibility, it’s important to know about their benefits.
So, with an offset account linked to your home loan, you can save your interest every day. Such an action will let you plan for other activities like refinancing, holidays, and a new car. You can even take advantage of an offset account to improve your cash flow. For example, offset accounts are flexible and let you access your money at any time. However, if you take your money out of them, it can impact your accrued interest.
Conversely, a redraw facility allows you to withdraw your money at your convenience. You don’t need to take out a separate loan to use the money for personal purposes. Moreover, you can easily access this facility through online banking, which makes it more user-friendly. You can also save your interest by limiting the use of this facility and clearing your debt soon. In addition to this, you can easily manage your scheduled repayments by making additional deposits.
The Right Choice For You Between Offset and Redraw
Although both offset and redraw work similarly, they have differences, and your choice will greatly depend on your financial habits. For example, choose an offset account for easy access to savings while reducing interest payments on your home loan.
However, a redraw is better for saving more on interest repayments when planning big goals like renovations. Thus, an offset allows flexible spending, while a redraw supports disciplined savings with limited access.
For more guidance on paying off your mortgage soon, contact us at Nfinity Financials or call us at 1300 GET LOAN or 0456 456 267.
FAQs
Q1. Which option, between offset & redraw facility, is better to pay off the mortgage soon?
You can use both methods to quickly pay off your mortgage, but the calculations will differ. For instance, an offset account consistently reduces your loan balance, which serves as the basis for interest calculations. However, a redraw facility requires you to make extra repayments first to get flexibility on some of your scheduled repayments.
Q2. What is the difference between offset account & redraw facility?
With limited access to your funds, a redraw is better, while with flexible access, an offset account is better. Additionally, a redraw lets you access extra repayments, while an offset is a separate account linked to your home loan, reducing interest.
Q3. Does an offset account work with fixed-rate home loans?
Most lenders offer offset accounts with variable-rate home loans, while only a few offer them on fixed-rate home loans.
Q4. Will having an offset account or redraw facility affect your loan repayments?
An offset account can lower interest, while a redraw facility can impact repayments, only if withdrawn. This can likely increase the loan term.
Q5. Can you have multiple offset accounts linked to your home loan?
Yes. Some lenders allow multiple offset accounts to maximise interest savings by spreading funds across different accounts.
