Offset v Redraw – The winner is?
Do you prefer to have money in your savings account or see your home loan balance reduce? That is in essence the difference between these two home loan features, both will result in a similar interest saving on your home loan but it sometimes comes down to personal preferences as above.
Let’s look further.
Offset: A transaction account linked to your homeloan where each dollar in that account (normally @ 100%) saves you paying interest on the same number of dollars of your homeloan. So say you had $10,000 in your offset account and a homeloan balance of $300,000, you would only be paying interest on $290,000 of your loan. This in effect gives you a rate of return (before tax taken into account) of whatever your homeloan interest rate is, for example 4.50%
Have all salary credited into this account so you start saving from that day of deposit, not when you get around to transferring it over from another account.
To maximize this return further, by keeping as much in your offset account for the longest period of time as possible, your daily interest savings are increased. Think about using your credit card interest-free period on day to day and other purchases and then sweep the balance to nil each month. You save homeloan interest and don’t pay credit card interest if you’re disciplined to pay it off in full.
Redraw: Where you pay additional payments into your homeloan, such as salary or large amounts, having the effect of lowering the daily calculation of interest. When you need to pay for items or purchases, cash out etc, you transfer money back into your everyday account and use that facility.
Normally this facility won’t incur a fee if it’s done via your internet banking site, some lenders charge if you go through their branch network.
Conclusion: There are advantages with both of these features and as I mentioned it can come down to personal preferences solely. Some like to see money in their account (offset) and others like to see their loan balance reduced (redraw). Mathematically they can save you similar amounts of interest and on a number of loans they are both available so you don’t have to have one or the other.
As with all discussions and thoughts about which is right for you, send me an email or give me a call and I’ll be able to assist you further.