Home Loan 101: Offset Vs Redraw
Welcome to Home Loan 101, where we'll be exploring the benefits of two popular mortgage features: offsets and redraws. Offsets and redraws are both useful tools which can help you save money on your loan repayments. In this post, we'll be looking at the differences between offsets and redraws, and how you can use them to your advantage to save on your mortgage repayments. So if you're curious to learn more about offsets and redraws, keep reading - you might just discover a way to save money on your home loan!
What is an Offset Account?
An offset account is a type of bank account that is linked to your home loan. It is a deposit account that allows you to offset your home loan balance with the amount of money in the account. The balance of the account is subtracted from the total loan amount, reducing the amount of interest that you are charged.
An offset account can be a great way to manage your home loan, as it reduces the amount of interest you are charged and can help you save money in the long run. It is important to note that you will still need to make regular repayments on your loan; the offset account simply reduces the amount of interest you are charged.
When considering an offset account, it is important to understand what type of features you are looking for. Some offset accounts may only allow you to offset the balance of your loan, while others may also allow you to make additional deposits into the account. Additionally, some accounts may also provide features such as redraw facility, which allows you to access extra funds if needed.
It is important to compare the different features of different offset accounts to ensure you are getting the best value for your money. Additionally, it is important to be aware of the fees and charges associated with the account, as these can vary greatly from one provider to another.
Overall, an offset account can be a great way to manage your home loan, as it reduces the amount of interest you are charged. However, it is important to do your research and compare the different features and fees of different accounts to ensure you are getting the best value for your money.
What is a Redraw Facility?
A redraw facility is a feature of a home loan that allows you to access the extra repayments you have made on your home loan. This means that you can access the additional money you have paid in your home loan, if needed, to cover unexpected costs or to take advantage of unexpected opportunities.
It is important to understand that a redraw facility is not a ‘cash advance’ or a ‘loan’ against your home loan. It is simply a feature that allows you to access the extra money you have already paid towards your loan.
When considering a redraw facility, it is important to understand how the facility works. Generally speaking, the facility will allow you to access the additional money you have paid towards your loan at any time. However, some lenders may have restrictions on how much you can access and the number of times you can access the facility.
It is also important to understand the implications of accessing your redraw facility. Generally speaking, drawing down from your redraw facility will mean that your loan will take longer to pay off and that you may end up paying more interest overall. Therefore, it is important to carefully consider the costs and benefits of using the facility before accessing it.
Overall, a redraw facility can be a useful feature of a home loan. It can provide flexibility and access to funds if you need them. However, it is important to understand how the facility works and the implications of accessing it before doing so.
Pros and Cons of Offset and Redraw
Offset and Redraw are two popular loan features available to Australian mortgage borrowers that can help them manage their home loan. It is important to understand the differences between the two options and weigh up the pros and cons when considering which is right for your circumstances.
Offset:
Pros:
• Offset accounts allow borrowers to use their savings to reduce the amount of interest they pay on their home loan. This can help borrowers pay off their loan faster and save money on interest over the life of the loan.
• Offset accounts also offer flexibility as borrowers can access their savings at any time without penalty.
Cons:
• Offset accounts require borrowers to keep their savings in a separate account linked to the loan, which can be inconvenient if the borrower has multiple accounts.
• Borrowers may be tempted to dip into their savings if they are facing financial difficulty, which can have a negative impact on their ability to pay off the loan.
Redraw:
Pros:
• Redraw facilities allow borrowers to access any extra payments they have made to their loan, giving borrowers greater flexibility in managing their finances.
• Redraw facilities can also help borrowers manage their cash flow by allowing them to access funds when they need them without penalty.
Cons:
• Redraw facilities may not be available on all types of home loans, so borrowers should check with their lender before applying for a loan.
• Redraw facilities may come with an associated fee, which can add to the overall cost of the loan.
When considering whether to opt for an offset or redraw facility, borrowers should take into account their financial goals and circumstances. For example, if a borrower has a large amount of savings and they are looking to pay off their loan as quickly as possible, an offset account may be the better option. On the other hand, if a borrower is looking for greater flexibility in managing their finances, a redraw facility may be the better option. Ultimately, borrowers should weigh up the pros and cons of both options and make the decision that best suits their individual circumstances.
When Should You Use Offset or Redraw?
When it comes to selecting the right home loan option, understanding the difference between offset and redraw can be crucial.
Offset is a type of loan that allows you to link your savings account to your home loan, so the balance of the savings is offset against the balance of the loan. This means that you will pay less interest on the loan, as the balance of the savings is taken into account when calculating the interest rate.
Redraw, on the other hand, is a type of loan that allows you to access the extra funds you have paid into your loan. This means that you can access the extra funds you have paid in case of an emergency or for any other purpose.
When deciding between offset and redraw, it is important to consider how you plan to use the funds. If you are looking to use the funds for a short-term purpose, such as an emergency, then redraw may be the better option. However, if you are looking to use the funds for a long-term purpose, such as home renovations or investments, then offset may be a better option.
It is also important to consider how you plan to manage your finances. If you plan to make regular payments into your loan, then offset may be better as you can save on interest. However, if you plan to make irregular payments, then redraw may be the better option as you can access the extra funds as and when you need them.
Finally, it is important to consider the fees associated with each option. Offset loans typically come with a lower interest rate, but may have higher fees associated with them. Redraw loans, on the other hand, may have lower fees but a higher interest rate.
Ultimately, the decision between offset and redraw will depend on your financial objectives and goals. It is important to weigh up the pros and cons of each option before making a final decision. It is also important to seek advice from a qualified financial advisor or mortgage broker to ensure you are making the right decision for your individual circumstances.
We understand you and we want to help
At Ello Lending, we understand that understanding the difference between a home loan offset and redraw can be confusing. We are here to help. If you have any questions about how an offset or redraw facility might be beneficial to your financial situation, please do not hesitate to contact us. We are here to help you make the best decision for your home loan. Thank you for reading our blog post and we look forward to hearing from you.
