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Understanding the Difference Between Offset Accounts and Redraw Facilities on Home Loans

Are you in the process of securing a home loan, or perhaps you're already a homeowner looking to make the most out of your mortgage? In either case, it's crucial to understand the various features and options available to you. Today, we'll dive into two commonly used strategies that can help you save money and reduce your mortgage term: offset accounts and redraw facilities.


Understanding the Difference Between Offset Accounts and Redraw Facilities on Home Loans
Understanding the Difference Between Offset Accounts and Redraw Facilities on Home Loans

What is an Offset Account?


An offset account is a transaction account linked to your home loan. It works by offsetting the balance of your transaction account against your home loan principal. The key feature of an offset account is that the balance in this account is subtracted from the outstanding loan amount before interest is calculated.


Here's how it works: Let's say you have a home loan of $300,000 and an offset account with $20,000. Instead of paying interest on the full $300,000, you'll only pay interest on $280,000 ($300,000 - $20,000). This can result in significant interest savings over the life of your loan.


The Benefits of an Offset Account:


  • Interest Savings: As mentioned, the primary benefit is reduced interest payments, which can potentially save you thousands of dollars over the life of your loan.

  • Flexibility: You can access the funds in your offset account whenever you need them without restrictions.

  • Reduced Loan Term: By consistently maintaining a healthy balance in your offset account, you can pay off your home loan sooner.


What is a Redraw Facility?


A redraw facility is another option offered by many home loan providers. It allows you to make additional payments towards your mortgage and then redraw those extra payments if needed. Essentially, it acts as a savings feature within your loan.


For instance, if you make an extra payment of $10,000 towards your home loan, that $10,000 is available for you to redraw at any time. However, it's important to note that some lenders may have limitations on how often you can access these funds or minimum redraw amounts.


The Benefits of a Redraw Facility:


  • Flexibility: It provides flexibility by allowing you to access extra payments made towards your home loan when necessary, such as for unexpected expenses.

  • Interest Savings: Similar to an offset account, making extra payments through a redraw facility can help reduce the interest you pay over time.


Which Option is Right for You?


The choice between an offset account and a redraw facility depends on your financial goals and spending habits. As Steve Keramidas, a trusted mortgage broker in Melbourne advises his clients, here are some considerations:


  • Offset Account: Ideal if you want to minimize your interest payments, maintain easy access to your funds, and aim to pay off your loan sooner.

  • Redraw Facility: Suitable if you want the flexibility of accessing extra payments when needed while still making progress on reducing your loan balance.


Remember, every financial situation is unique, and it's essential to consult with a knowledgeable mortgage broker like Steve Keramidas to determine the best strategy for your specific circumstances.


In conclusion, both offset accounts and redraw facilities offer valuable benefits when managing your home loan. The key is to align your choice with your financial goals and work with a trusted mortgage broker who can help you make informed decisions. With the right strategy, you can potentially save money and achieve your homeownership goals faster. So, if you’re in the market for a home loan, be sure to contact Steve Keramidas from Mortgage Compare Plus.

 

Disclaimer: This article provides general information only and may not reflect the publisher’s opinion. None of the authors, the publisher or their employees are liable for any inaccuracies, errors or omissions in the publication or any change to information in the publication. This publication or any part of it may be reproduced only with the publisher’s prior permission. It was prepared without taking into account your objectives, financial situation or needs. Please consult your financial adviser, broker or accountant before acting on information in this publication.





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