Home loan is not only about the interest rate you’re paying or about to pay. It’s also important to look at other features to make it affordable and save money. Redraw and Offset are among the popular features and almost work similar ways. The idea is to allow you to reduce the balance of your home loan. Therefore the interest charged, by applying extra money to your debt.
With the redraw option, you can deposit some extra amounts into your home loan account, and redraw that in future.
In the meantime, the extra repayments you’ve made will lower the home loan balance amount of interest charged while still giving you access to your money. But the lender may have some restrictions on the amount of redraw and may impose fees on that.
In most of the cases, fixed interest rate or basic home loans products may not have the redraw option. Or may have limited option for redraw. It is important to work out on how a loan’s redraw facility works. As the fees and restriction attached may outweigh the benefits of interest savings.
An offset account, on the other hand, is a transaction account connected directly to a home loan. The balance of your offset account is subtracted from the remaining principal prior to interest calculation in home loan. So technically you’re paying less interest. If you’ve extra funds available, you can keep those amounts in an offset account. And save on interest while keeping the loan itself free of personal transactions.
You may find either partial offset or full offset option depending on the loan product. Full offset or 100 percent offset accounts can earn interest equal to the interest you are paying on your loan compared to earnings on any other savings account rates. Usually, full offset accounts have fewer restrictions and more flexibility
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Now deciding between an offset account and a redraw facility or both on your home loan will depend on your financial circumstances and objective.
In simple words, if you’ve extra funds and not going to use anytime soon, it’s better to put into an offset account to offset your interest amount on the home loan.
Redraw option requires some extra planning in terms of how much to pay off or redraw and when. Many lenders may also have set minimum redraw amount and may charges fees on each withdrawal.
Offset accounts may also come with account fees, but the fee may be worth the interest savings and the added flexibility compared to redraw facilities.
With the hundreds of home loan products available in the market, it is wise to do some researches and compare among the lenders. Often one lender may have restrictions on redraw features while others can give you full benefits. We suggest getting professional advice to find out what suits you the best.
We can help you to research, compare and find a home loan that matches your needs and help to make your home loan process a lot easier.