Loan Redraw Or Offset Accounts - Which Is Best ?

Welcome to our blog! Today, we'll be exploring the differences between loan redraw and offset accounts - and helping you decide which is best for you. Loan redraw and offset accounts are two great ways for borrowers to access the equity they have in their home and make the most of their mortgage. They both have their advantages and disadvantages, so it's important to consider the pros and cons carefully before making a decision. In this blog post, we'll take a look at the differences between loan redraw and offset accounts, the key features of both, and their respective benefits and drawbacks. We'll also provide you with some tips to help you decide which option is best for your financial situation. So, let's get started!

What Is the Difference Between Loan Redraw and Offset Accounts?

The difference between loan redraw and offset accounts is an important one for Australians to understand when it comes to managing their home loan. In short, a loan redraw allows you to take out extra payments that you have made on your loan, whilst an offset account is a separate account linked to your loan that can offset the interest you pay.

Loan redraw is a feature that allows you to access extra payments you have made on your loan, without having to apply for a new loan. This means that you can take out any extra payments you have made on your loan, such as those from your salary or bonus, and use them for other purposes. This can be a great way to access extra funds if you need them.

On the other hand, an offset account is a separate account that is linked to your loan. Any money held in the account is used to offset the interest you pay on your loan, meaning you save money on the interest you pay over the life of your loan. For example, if you have $20,000 in your offset account, the interest you would pay on your loan would be reduced by $20,000. This can be a great way to save money over time, and can be particularly beneficial if you have a large amount of money that you can save in the offset account.

When deciding whether to use a loan redraw or offset account, it is important to consider your individual circumstances. If you need access to extra funds quickly, a loan redraw may be the best option. However, if you have the ability to save money over a longer period of time, an offset account may be the more beneficial option.

It is important to remember that loan redraw and offset accounts are both tools that can be used to help manage your home loan. Ultimately, the decision of which one is best for you will depend on your individual situation, so it is important to consider both options and make an informed decision.

Benefits of a Loan Redraw Facility

A loan redraw facility can be a great option for borrowers who want to make the most of their repayments. A redraw facility allows borrowers to access additional funds from the loan amount that has already been paid off, giving them access to extra cash if they need it.

One of the biggest benefits of a loan redraw facility is that it can be used to pay off other debts or provide extra cash for bills. For example, if a borrower has paid off more than the minimum repayment on their loan but needs to pay for an unexpected medical bill, the extra money in their redraw facility could help. This can be an effective way to pay off debt and keep finances on track.

Another benefit of a loan redraw facility is that it can help borrowers to save money. If a borrower has extra funds available, they can put them towards reducing the principal loan amount, which can save them money in interest payments over the term of the loan.

When considering a loan redraw facility, borrowers should think about how much they are likely to use it and if it is necessary at all. It is important to remember that the amount that can be redrawn is limited, so it is important to only use the facility if it is really needed. Borrowers should also keep in mind that redrawing funds will increase the total amount of interest that needs to be paid back over the life of the loan.

Finally, it is important to remember that borrowers should check with their lender to make sure that they are eligible for a loan redraw facility. Some lenders may have restrictions on the amount that can be redrawn, or may not offer redraw facilities at all. Borrowers should also consider any fees and charges that may be associated with using a loan redraw facility.

Benefits of an Offset Account

Offset accounts can be a great way to reduce the amount of interest you pay on your mortgage and save money in the long term. They work by linking a savings account to your home loan so that any funds held in the savings account are offset against the balance of the loan. This means that the interest you pay on your loan is calculated on the net balance of the loan after taking into account the funds held in the savings account.

The benefits of an offset account are twofold. Firstly, it allows you to reduce the amount of interest you pay on your loan, as you are only paying interest on the net balance. Secondly, it gives you the flexibility to access the funds held in the savings account at any time if you need them. This can be useful in the event of an emergency or if you want to make a larger payment towards your loan to reduce the term of the loan.

When considering an offset account, it is important to consider how much you can realistically save by having the account, as well as understanding the fees and conditions associated with the account. Some banks may charge fees for maintain the account, so it is important to understand if these fees outweigh the savings you could potentially make.

Another important factor to consider is whether or not the funds in the savings account are accessible in the event of a dispute or separation. In Australia, the Family Law Act 1975 states that any funds held in a joint account are subject to division in the event of a dispute. Therefore, if you are considering an offset account with a partner, it is important to understand how the funds in the savings account would be divided in the event of a dispute.

Overall, an offset account can be a great way to reduce the amount of interest you pay on your loan and can be a great way to save money in the long-term. However, it is important to consider the fees and conditions associated with the account, as well as the potential effect of a family law dispute. Taking all of these factors into account will help you make an informed decision about whether an offset account is the right choice for you.

Which Option Is Best for You?

When considering the best option between loan redraw or offset accounts, it really depends on your individual circumstances.

The key thing to consider is your repayment strategy. If you are looking to minimise the amount of interest that you pay on your loan, then an offset account is likely to be the better option. This is because the balance of your offset account is deducted from the amount of the loan on which you pay interest. This means that you save money on interest, as you are only paying interest on the net loan amount.

If you are more interested in having access to funds for emergency or other purposes, then a loan redraw facility may be the best option. A loan redraw allows you to access money from the loan at any time, as long as you have made extra repayments into the loan. This means that you can use the extra repayments to access money in an emergency or to pay for other expenses.

Another factor to consider is whether you are likely to need access to the money in the near future. If you are likely to need access to the money in the near future, then an offset account may be the better option. This is because with an offset account, you can access the money in the account at any time without penalty.

It is also important to consider the fees and charges associated with each option. Generally, loan redraw facilities will have higher fees and charges than offset accounts. So if you are looking for the most cost effective option, then an offset account may be the better option.

Ultimately, the best option for you depends on your individual circumstances, goals, and objectives. It is important to take the time to consider your needs and the pros and cons of each option before making a decision. Additionally, it is important to seek advice from a qualified financial advisor or mortgage broker to ensure that you make the best decision for your individual circumstances.

We understand you and we want to help

At Ello Lending, we understand that choosing between loan redraw and offset accounts can be difficult. That's why we're here to help - our team of experienced mortgage brokers are ready to provide tailored advice to suit your individual needs. We can help you assess your personal situation and decide which option is best for you. So if you're considering either loan redraw or offset accounts, don't hesitate to get in touch with us. We'd love to answer any questions you may have and help you make the right decision.