Offset Accounts vs. Redraw: Which One Works Best for You?
When it comes to managing your mortgage and reducing interest, both offset accounts and redraw facilities offer valuable benefits, but they function in distinct ways. At The Lending Society, we’re committed to ensuring that you make the best decision for your financial future by understanding how these two options work and what makes them unique.
Offset Accounts: How They Work
An offset account is essentially a transaction account that’s linked to your mortgage. The balance in this account directly offsets your loan, meaning you only pay interest on the difference between your loan balance and the amount in your offset account. For example, if you have a $500,000 mortgage and $50,000 in your offset account, you’ll only pay interest on $450,000.
Therefore you can potentially reduce the amount of interest you’re charged without actually paying the money into the loan itself. Plus, the funds in your offset account remain fully accessible, so you can use them anytime without impacting your mortgage’s overall structure. This flexibility makes it a great option if you want the best of both worlds - saving on interest while having easy access to your money.
An offset account usually has monthly fee, annual fee or a higher interest rate.
Redraw Facility: What’s Different?
A redraw facility, on the other hand, allows you to make extra repayments towards your mortgage, which directly reduces the outstanding balance. These extra payments lower the interest charged since the loan amount is smaller. However, the key difference is that the money is tied up in your loan, and accessing it requires you to make a redraw request.
Unlike an offset account, a redraw facility can have conditions, such as limits on how much or how often you can withdraw. Some lenders may even charge fees for withdrawals. While you’re still reducing your interest and loan term by making extra payments, the flexibility is more limited compared to an offset account.
Key Differences Between Offset Accounts and Redraw Facilities
- Flexibility: Offset accounts offer immediate access to your funds, while redraw facilities may restrict access to your extra payments.
- Interest Savings: Both options reduce the amount of interest you pay, but an offset account affects your loan balance without physically reducing it, whereas a redraw directly lowers the mortgage balance.
Which Is Right for You?
If you want easy access to your money while still benefiting from interest savings, an offset account might be the best option. It’s ideal for homeowners who value flexibility and want to manage their funds without restrictions. On the other hand, if you’re focused on paying off your mortgage faster and are okay with not having immediate access to extra payments, a redraw facility could be a better fit.
At The Lending Society, we’re here to guide you through the complexities of mortgage management. Whether you choose an offset account or a redraw facility, our expert finance brokers will ensure you’re well informed and confident in your decision, so you can maximise your savings and achieve your financial goals.