Today’s home loans are packed with features and flexibility that make your mortgage easier to manage while providing ways to save on loan interest.
For many home buyers, a key question is ‘which is better – redraw or offset?’ We look at how they both work to help you make an informed choice.
Redraw – the flexibility to access extra payments.
Redraw is a feature of most variable rate home loans. It works by letting you withdraw any extra payments made on your loan.
Paying a bit extra is a simple way to save on loan interest and helping to clear the home loan slate sooner. However, there can be times when you need cash in a hurry, and that’s where the appeal of redraw lies. Those extra repayments aren’t locked away – you have the reassurance of knowing the funds are available if an emergency or unexpected bills crop up.
Offset – a cash account linked to your loan.
Offset home loans work quite differently. An offset account like the Defence Bank Home Loan offset account is a separate cash account linked to your home loan. Money sitting in an offset account won’t earn interest. However, the balance is deducted from – or ‘offset’ against – the value of your loan when monthly interest charges are calculated.
As a guide, if you have $50,000 in an offset account and a home loan balance of $300,000, loan interest is based on a balance of $250,000 ($300,000 less $50,000). This lowers the interest expense, so more of each monthly repayment goes towards paying off your loan. In this way, offset can help you get ahead with your loan without the need to make extra payments.
Accessing your cash.
While redraw and offset have plenty in common, there are also key differences.
Some lenders charge fees each time you withdraw money via redraw. You may also face limits on the minimum and maximum amounts that can be redrawn. In addition, there can be a time delay between making a request to redraw cash and actually receiving the funds in your nominated account.
By contrast, an offset account is usually ‘at call’. This means your money is accessible any time via ATMs, EFTPOS or over the counter withdrawals. There may be little or no fees attached to withdrawals, and how much you withdraw may be limited only by your account balance. This can mean your money is a lot more accessible if you need cash urgently.
Discipline can be required.
Making the most of an offset account can call for some self-discipline. Having a reasonable balance in the offset accounts will help you maximise the savings on loan interest. Continually dipping into your account or maintaining a low balance can reduce the potential savings on home loan interest.
By contrast, when it comes time to redraw, the process of requesting cash out via redraw can act as a deterrent to making regular withdrawals. You may find for instance, that you use redraw as a ‘last resort’ option, which keeps your spare cash working harder for longer to save on home loan interest.
Do offset home loans come with a higher rate?
Redraw is a feature of most low rate variable home loans. While offset loans offer plenty of flexibility, they can come with a higher interest rate.
This makes it worth thinking about whether you’re likely to hold a reasonable balance in the linked account to make the most of offset, or if you could save more by making additional repayments on a lower rate loan offering redraw.