Offset Accounts and Redraw Facilities
What is an offset account?
An offset account is a savings account related to your home loan. It 'offsets' the principal of your loan so that the interest payable on the loan is reduced. For example, if the balance on your home loan is $250,000 and at the same time you have $10,000 on your offset account. Assuming an interest rate of 6%, then you would only need to pay interest of (250,000-10,000)*6% = $14,400. In other words, you only pay interest for the $240,000 borrowed.
Note that mortgage interest is accumulated on a daily basis, so that as long as there are funds in an offset account, those funds can contribute to interest savings. The ultimate implication is that you will be better able to pay back your loan.
From a bank's perspective, providing offset accounts to customers would enhance their competitiveness because they gain more customers to deposit with them.
What are the benefits of an offset account?
1 Reduction in interest payments
This is the first and foremost benefit of an offset account. Continuing with our previous example, if there is $250,000 in your offset account, then the interest payable become (250,000-250,000)*6% = $0. You do not need to pay any interest!
2 Functions of a normal savings account
An offset account can be used to make transactions and it allows transfer of funds. You can easily redraw funds from your offset account when you need money.
3 Ease of financial management with multiple offset accounts
Some lenders offer multiple offset accounts which are linked to your mortgage. This provides convenience for financial management.
4 More benefits compared to a savings account
An offset account is even better than a savings account since the interest reduction on your loan from an offset account is greater than the interest earned on a savings account.
Some precautions about offset accounts
There are many types of offset accounts. Some can offset 100% of loan servicing while others may only offset a portion. Remember to chose the type of offset account based on your own circumstances and preferences.
Offset account are usually only available for floating rate loans. Most fixed rate loans offered by banks do not have an offset option.
Although there is no administration fee for an offset account, there is an annual fee. The annual fee does not increase with the number of loans in a package. Also, there is no need to pay the loan application fee if the annual fee for the offset account is paid.
What is a redraw facility?
A redraw facility is usually attached to flexible rate loans and some fixed rate loans. The redraw facility allows access to the extra repayments that you have made on your loan above the required minimum repayments.
For instance, if the monthly minimum repayment on your loan is $700, but your actual monthly repayment amounted to $900, then after 12 months your additional repayments will sum to (900-700)*12 = $2,400. The redraw facility allows you to access the $2,400.
Benefits of the redraw facility
1 Accelerated repayment of loan
Since using the redraw facility requires the borrower to make additional payments over and above the minimum repayment, this shortens the loan period. This is beneficial for those who have idle cash in hand.
2 Tax Benefits
The interest saved from using the redraw facility is not taxed. In contrast, the interest earned on a normal savings account would be taxed.
Some precautions about the redraw facility
The redraw facility needs to be applied when you apply for your mortgage. A fee will be involved.
Some lenders may charge a fee each time you redraw cash. Fees vary depending on the lending institution. Some lenders provide an amount of free redraw opportunities and charge a fee after that amount is exceeded.
Offset account vs redraw facility
In terms of interest savings, both an offset account and a redraw facility reduces the amount of interest you need to pay for your home loan. An offset account 'offsets' the interest payments and does not change the principal on the loan; while a redraw facility reduces the principal on the loan by accelerating repayments.
An offset account is a separate savings account that is controlled by yourself - withdrawal or injection of funds are your own decisions. While the redraw facility is an additional feature of your loan product, and is in essence a form of borrowing from the bank. This is because the additional repayments you make are in effect the bank's money already, so using the redraw facility to access the funds would be to borrow from the bank.
The choice between an offset account and redraw facility depends on your own needs and circumstances. If you wish to benefit from tax reductions, you could choose the redraw facility; while if you want the flexibility of accessing funds, you could opt for an offset account.
Want to know more?
If you would like to inquire more about your home loan, or you are in the process of trying to secure a loan, feel free to visit the KBRZ office and have a chat from 9a.m.- 5p.m. Monday to Friday. Our address is 1-5 Railway Street Suite 805 Level 8 Chatswood Central South Tower, Chatswood NSW 2067.
Or call us at 1300 588 978 and talk to our home loan experts.
KBRZ is one of Australia’s fastest-growing real estate and finance solutions companies. We have professional background in property sales, loans, as well as investment funds. We are located in Sydney, Australia. We also have offices in Melbourne, Beijing and Shanghai. We speak Mandarin and English.
With advanced investment strategy and strict risk control methodology, KBRZ endeavours to provide steady and solid wealth accumulation for our valued customers.