When it comes to managing and paying off your mortgage, finding ways to save money is a top priority. Luckily, there are financial tools available that can help reduce the overall interest charged on your home loan. Two such tools are redraw facilities and offset accounts.
Redraw facilities and offset accounts work in similar ways, both allowing you to decrease the balance of your home loan and subsequently reduce the amount of interest you pay. However, the decision of whether to choose an offset account or a redraw facility depends on how easily accessible you need your extra money to be.
Let’s start by understanding how these two options work. With a redraw facility, you are allowed to make additional payments towards your home loan above the required monthly instalments. These additional funds are then held within the facility as a credit against your mortgage. These funds can be accessed if needed, either in part or in full, through a request to your lender. Redraw facilities provide a level of flexibility and allow you to access the extra funds when necessary, while still reducing your mortgage balance and thus saving you money on interest.
On the other hand, an offset account is a separate bank account linked to your mortgage. The money held in this account is deducted from the outstanding balance of your loan before calculating the interest charges. For example, if you have a $500,000 mortgage and $50,000 in your offset account, you will only be charged interest on $450,000. The interest savings from the offset account can be substantial, especially if you maintain a significant balance over time.
While both redraw facilities and offset accounts can save you money on your mortgage, they differ in the accessibility of the extra funds. With a redraw facility, you can access the additional payments at any time, but there may be restrictions or fees associated with withdrawing the funds. This means you need to plan ahead and consider your immediate financial needs before making additional payments. On the other hand, an offset account provides immediate access to your extra funds, as it functions just like a regular bank account. You can deposit and withdraw money as needed, without any penalties or restrictions.
So, how do you decide which option is best for you? It depends on your personal circumstances and financial goals. If you have a stable income and do not anticipate needing immediate access to the extra funds, a redraw facility might be suitable. This option allows you to reduce your interest payments while maintaining the flexibility to access the funds if needed.
On the other hand, if you have irregular income or anticipate needing immediate access to the extra funds, an offset account may be the better choice. The ability to deposit and withdraw money freely can provide peace of mind, knowing that your money is readily available. Additionally, an offset account can be a great way to save money for other purposes while still reducing your interest payments.
Before making a decision, it is essential to evaluate the specific terms and conditions offered by your lender for both redraw facilities and offset accounts. Consider any associated fees, withdrawal restrictions, and the potential impact on your loan term and interest payments. It’s important to note that not all lenders may provide both options. We advise discussing the specifics with your mortgage provider or consult with a reputable mortgage broker for guidance in your decision-making process.
In conclusion, both redraw facilities and offset accounts offer valuable ways to save money on your mortgage. By reducing your loan balance, you save on interest payments over time. However, the choice between the two depends on your need for accessibility to the extra funds. Assess your personal circumstances and financial goals before making a decision and consult with your lender to determine which option is best suited to your needs. With the right financial tool in place, you can take control of your mortgage and save money in the process.