“Risk comes from not knowing what you’re doing”- Warren Buffett..
Find the right mortgage product can be amazingly tough due to the high competition of the mortgage industry. “Offset” facility is one of the common terms we hear in the home loan industry. I find over 60% of refinance home loan clients have the offset facility. However, 40%-50% clients have got less than AUD 5000.00 to AUD 6000.00 in their savings accounts. Surprisingly, they have had the facility for years. It appears to me that many every day Aussies unsure how the facility functions. This blog explains the difference between the offset facility and the redraw facility and how you could save money in your home loan.
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.
Redraw facilities allow you to deposit spare income into your home loan account, allowing you to redraw a sum equal to the extra repayment amounts in future.
In the meantime, the extra money paid will lower the amount of interest charged while still giving you access to your money.
However, there may be restrictions on how much money can be withdrawn and when.
For redraw, it depends on whether the facility applies to a fixed-rate or variable loan. Most institutions only allow redraw from a variable-rate loan, or fixed-rate loan but with limited access.
It is important to find out how a loan’s redraw facility works before taking it on, as the fees and restriction attached might outweigh the benefits of interest savings.
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.
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. For this service, lenders can charge a monthly or annual fee. Offset accounts can offer 2 different functions. Either partially offset (lender will decide the percentage of the offset ie; 40 or 50%) or 100% offset.
Let’s say that you are paying five per cent interest on your home loan and earning two per cent interest on your offset account,
In an offset setup, the difference would be 3%, but would mean that the 2% interest that you earn is coming off the interest you are paying on your home loan.
With 100 per cent 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.
Let’s say you have $10,000 in your 100 per cent offset account. Instead of paying interest on your $100,000 loan, you are only paying interest on $90,000, that’s probably the best type to have, if you are looking at offset accounts.
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.
There are less restrictions attached to 100 per cent offset accounts, they’re very flexible. But really, it does just depends on each lender and how much client can save and their savings pattern.
Mel Finance, we are a responsible Mortgage Broker in Melbourne, as we go through a 13 page client’s needs analysis questions to find out more in depth of our client’s requirements and objectives to ensure that we find the best suitable product, which suits their needs.
Finding a loan that matches your needs is a lot easier with an expert on your side.