Mortgages can be complex beasts. With banks using complicated jargon it’s difficult to read between the lines. For example, what’s redraw and how is it different from an offset account?
Let’s start with redraw. Redraw is a feature of some home loans where, if you pay extra repayments on top of your minimum repayment amount, you build up excess funds in your loan. For example, if you pay $50 extra per week onto your loan, you’ll end up with $2,600 available for redraw at the end of the year. Think of the amount in your redraw as a savings account. Each time you pay extra money onto your loan, the account fills up. You can then withdraw money from that redraw balance to pay for things like holidays, renovations or to cover expenses.
An offset account is like a bank account that you can pay money into. The difference is that it’s linked to your home loan, so that instead of earning interest on the account, like a savings account does, it actively works to reduce the interest you are charged on your home loan balance. So, for example, if you had a home loan of $400,000 and an offset account balance of $3,000, you would only be charged interest on a loan balance of $397,000. That’s because the balance in your offset account means you aren’t charged interest on that money.
The benefit of an offset account is that you can access the money whenever you like – there are no strings attached. The only thing to be conscious of is that if you withdraw money, you will be charged more interest on your loan each month. Also, some banks only let you have an offset account on particular types of loans.
A redraw works well because the money is not as easily accessible. Since you need to request a withdrawal, it’s more ‘out of sight, out of mind’. It’s also a nice way of seeing how far ahead of your repayments you are – building up the balance in your redraw is a great achievement.
You can always have both a redraw facility and an offset account. It’s a good idea to maximise the benefits of both and to always try to pay off as much as you can on your loan as soon as possible. Paying even an extra $10 a week will add up and save you money over the course of 30 years.