Offset Account vs Redraw
Offset accounts and redraw facilities are two home loan features that allow you to use extra income or savings to help reduce the amount of interest you pay on your home loan, assisting you to pay off your loan sooner. There are similarities between the two, but they operate in different ways.
An offset account is a savings or transaction account that is run in conjunction with your loan account. Instead of earning interest (where you would be subject to tax) the account’s balance is ‘offset’ against your home loan balance. As a result, you are only charged interest on the difference between the two.
You may have your salary deposited into a savings or transaction account linked as an offset to automatically save you money on your interest payments.
A redraw facility is not a separate account but a feature that enables you to deposit any spare income directly into your home loan account, you can then redraw from the loan any funds that are in excess of your regular repayments. The balance in your redraw account automatically reduces the interest charged on your home loan, similar to an offset account.
If an offset account and a redraw facility have the same outcome in terms of interest savings, what are the advantages of one over the other?
Because offset accounts are essentially saving accounts they operate as such, you’ll have easy access to your funds and most come with card access and phone banking. The good news is that lenders cannot restrict your access to these funds as they are your savings, depending on the individual lender offset accounts are usually offered as part of a ‘package’ that may incur a monthly or annual fee.
A redraw facility may not be as flexible as an offset account. Some lenders have a minimum redraw amount and can charge a withdrawal fee. Each lender is slightly different with some having the ability, right or discretion to freeze a redraw capacity. However, as your funds are less accessible it enables you to build up your savings faster and helps to reduce the overall interest paid on your loan.
All lenders are different. Assessing the best way to manage your finance and home loan depends on a range of factors according to your personal circumstances, spending and savings habits.
If you have any queries are would like to discuss the best option for you, please contact the Orium Team on 02 8330 3700.
Disclaimer: This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and that your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances. © 2018
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