006

Offset accounts and redraw facilities work in similar ways; they both allow you to reduce the balance of your home loan, and therefore the interest charged, by applying extra money to your debt. They also are an effective means to build a “buffer” for a rainy day.

Redraw allows you to deposit spare income into your home loan account, and it sits in credit reducing your interest bill, while at the same time being available to “redraw” in the future.

However, there may be restrictions on how much money can be withdrawn and when. These include restrictions on the minimum amount to redraw each time (eg $1,000 minimum), and some banks may also impose a fee for each redraw (eg $50). Also, there can be a delay in accessing the funds (eg 24 hours)…which can be restrictive for some people, and a good idea for others!

It is important to find out how a loan’s redraw facility works before taking it on, as any fees and restrictions attached will either be very suitable for you and assist in creating good money habits and “getting ahead”… or may be too restrictive, in which case an offset account may be more suitable, albeit with a hefty annual fee.

Deciding between an offset account and a redraw facility on your home loan largely depends on how accessible you need your extra money to be, as well as the associated bank fees.

Offset accounts are like savings accounts that function alongside your home loan. You earn interest on the money in the offset account and you often have a debit card attached for simple withdrawals.

With most offset accounts, you earn interest equal to the interest you are paying on your loan. Rather than earning savings account rates, you are earning home loan account interest rates on the money held within the offset account. The interest calculated on the savings is “offset” by being deducted form the interest charged on your loan account each month.

Offset accounts, like many savings accounts, often come with account fees, but the fee may be worth the interest savings and the added flexibility compared to redraw facilities. These fees can up to $400 dollars each year (many thousands of dollars over 30 years), and an assessment should be done on the benefits compared to the costs.

As noted above, for some borrowers having almost instant access to the surplus funds that are your “buffer” and are reducing the interest on your loan is a good thing, and for some borrowers it is better to have slightly more restricted access to the funds, as this forces a habit of building a larger “buffer”, whilst still remaining accessible if really needed.

For some borrowers I ask is it really wise to have access to your additional loan repayments and savings buffer at the ATM at 2am on Saturday morning….. Good money habits are formed in many ways, and if you need a hand with “savings” (as most people do) then a redraw facility (without the annual fees of an offset account) might be the better option all round.