How offset and redraw work?
Offset and redraw are features designed to reduce interest costs and offer financial flexibility. An offset account links to your loan and reduces the amount of interest charged by offsetting the loan balance with the account balance. A redraw facility allows access to any extra repayments made on the loan, providing flexibility while still contributing to interest savings.
Redraw Facility
How It Works:
Extra Repayments: You make extra repayments on top of your scheduled home loan payments. These extra funds are stored in your home loan account.
Accessing Funds:
If you need money, you can access these extra repayments through the redraw facility.
Interest Savings:
The extra repayments reduce the principal of your loan, which in turn reduces the interest you pay. However, if you withdraw these funds, the principal increases again, which means interest charges will rise.
Advantages
- Flexibility: You can access your extra payments if needed, providing a financial cushion.
- Interest Reduction:Reducing the principal balance lowers the interest you pay over the life of the loan.
Disadvantages
- Potential Fees: Some lenders may charge fees for accessing funds via redraw.
- Less Control:The money is tied up in the loan account, so you don’t have as much control over your funds compared to an offset account.
- Tax Implications:Redrawing funds is considered as new lending to ATO, which may have tax implications for Investment Properties
Offset Account
How It Works:
- Separate Account: An offset account is a transaction account linked to your home loan.
- Interest Calculation:The balance in your offset account reduces the amount of your home loan balance on which interest is calculated. For example, if your loan balance is $300,000 and your offset account has $10,000, you only pay interest on $290,000.
- Access:You have full access to the funds in your offset account, allowing you to make deposits, withdrawals, and use it for everyday transactions.
Advantages:
- Liquidity: You can access and use the funds in the offset account as needed while still reducing the interest on your loan.
- Daily Interest Calculation:Since interest is calculated daily, keeping more money in your offset account can lead to greater savings.
Disadvantages:
- Fees: Some offset products may cost extra
- Temptation to Spend: Easier access to funds may increase chance of spending your savings.
Do you need an Offset?
Considerations
- Access to Funds: If you need occasional access to extra funds, a redraw facility might be more suitable. If you prefer having more control and frequent access to your funds, an offset account could be better.
- Interest Savings: Both options can reduce interest, but an offset account might offer more consistent savings due to daily interest calculations.
- Fees and Features: Compare the fees associated with both options and assess how they fit with your financial habits and goals.
- Tax Consequences: Offset accounts help avoid tax complications for investment properties, especially when converting your home into one. Unlike redraw, using offset funds isn’t treated as new lending, reducing the risk of loan contamination. If unsure, consult an accountant.
Combination Approach
- Hybrid Use: Some borrowers use a combination of both features, such as maintaining an offset account for daily transactions and having a redraw facility for additional flexibility with repayments.
- Ultimately, the best choice depends on your personal financial situation, goals, and preferences. Consider consulting with a Home Loan Specialist at Low Rate Home Loan to determine which option aligns best with your needs.