When choosing a home loan it can be hard to decide what specific features are needed, and in some cases what these features even are.
Two common features that often cause confusion are offset accounts and redraw accounts.
An offset account is a transactional account that you are able to use as a normal deposit account. It allows you to deposit and withdraw money as you would a standard account.
The beauty about this account is the money you have in this account will also “offset” the balance in your loan account. What this means is, if you had a loan with $200,000 owing, and you had $10,000 in your offset account, the bank would only charge you interest on $190,000.
The biggest benefit of an offset account is the ease of access to your money, and the obvious reduction in interest that you will pay on the home loan.
One aspect to be aware of is that certain banks may charge a slightly higher rate of interest for a home loan with an offset account.
A mortgage with a redraw facility will allow you to pay extra money off your loan, and allow you to take this money back out if you need to access it.
If your minimum repayments were $1500 per month, and you decided to pay $1600 per month, at the end of the year you would be approximately $1200 ahead in your mortgage repayments. With a redraw account you could withdraw the money back out if needed.
The benefit of a redraw facility is that you can pay down your loan as quickly as possible, while still being able to access these funds again in the case of an emergency.
While a lot of lenders will allow free access to these funds, certain banks will charge a small fee to access the funds, or have a minimum amount that you can redraw at a time.
Essentially an offset account and a redraw account are doing the same thing. They are both designed to help you use your money to reduce the amount of interest you pay on your home loan. While most banks offer these features in a loan, their fees and interest rates vary significantly. It would be wise to consult a mortgage broker to find a loan to suit your needs.
Did you choose between an offset and a redraw account when you set up your home loan – how did you choose between the two? Share your experience in the comments below!
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