Can someone explain the difference between an offset account and redraw. Is an offset account really that important for the loan we have on the property we live in?
Redraw is where you can withdraw the extra loan repayments that you make above the minimum repayment amount set by your lender directly from your home loan. This is usually done via internet banking. Depending on your lender; you may have restrictions on the minimum amount you can redraw from your loan as well as the frequency that you can redraw each month.
An offset account is basically a transaction account linked to your home loan. The balance of the offset account reduces the interest charged on your home loan. For E.G. If you have a $100,000.00 home loan and have $2,000.00 in your offset account then you only pay interest on $98,000.00. Funds in the offset account are linked to a debit card and can be used just like a normal savings account.
Hope that helps!
South West Lending Solutions
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Good afternoon Kay,
It’s a really good question for number of reasons but I’ll elaborate on why I think an offset account is important when your owner occupied property.
Mind you I’m extremely curious as to who may have helped to secure your loan In the first instance and secondly why they did or didn’t explain the difference between the two. While I essentially they do the same thing structurally they are significantly different.
The key difference between a redraw and an offset account is that the positive balance in a redraw facility is not as easily accessible as an offset account.
Redraw kid a feature that is built into the home loan. It is essentially the difference between the scheduled balance and the actual balance of the loan. Some lenders provide this for free while others charge you for each redraw. If you were to deposit additional funds into the redraw facility would reduce the loan balance and as interest is calculated daily and debited monthly, it would reduce your monthly interest cost For every day it is in the loan.
The offset account is a credit account that is operated exactly the same as how you would run a normal transaction account. The fundamental difference of this is it is linked, sits alongside, your home loan. Your home loan, being a debit account where interest is calculated daily and debited monthly is “set off” against the offset account, being a credit account, to establish the actual loan balance that interest is to be calculated on.
Essentially day, being the bank, will take your home loan balance and minus the balance of the offset account to achieve the actual balance where they will calculate your total interest cost upon.
Assume you had a home loan that had $300,000 as the current balance. And in your offset account, which is separate, you have $125,000. At the end of the day the bank will rule the line underneath that and minus the $300,000 from the $125,000 to give you the new loan balance of $175,000 which will be the amount the bank calculates the interest on for that day.
The biggest benefit you get from having an offset account is you have those funds available all day every day with ATM access and generally no additional fees or charges. I
Offset accounts are wonderful to help you in managing your cash flow to help your own your home sooner and keeping control of expenditure while minimising interest. I another very strong benefit out of an offset account is that it is isolated from your other accounts and can be very good way to administer your cash management .
I trust some of my views will be helpful in creating more awareness around offset accounts and redraw facilities.
Outside of the finance brokers answers, what are your plans for the house longer term? If you have any inclination of turning this into an investment property down the track, using the offset format can be much more beneficial from a tax perspective.
Both will save you interest, the bigger question comes "at what cost"? Is the redraw loan at a higher or lower interest rate to the offset format? Generally speaking, you cannot lock in the interest rate with these features.
Speak with your finance broker or one of the guys above, and maybe look at splitting up the borrowing to take advantage of fixed rate loan and redraw/offset options.
If considering the option of renting out the property down the track, speak with your accountant as well, and have them work with the finance broker to set up with both short and long term plans considered.