Mortgage offset accounts and redraw facilities are now available from most lenders as features of your home loan, help you manage it more effectively.
Both features can make a significant impact as part of a mortgage reduction strategy, taking years off your mortgage and helping to save in interest repayments.
The basis for each technique is simple: by making extra repayments to your principal loan amount you will reduce the interest you are charged – thereby reducing the life of your loan.
While both mortgage offset accounts and redraw facilities can be an effective mortgage reduction tool for many borrowers, you may find that you are paying a higher rate on your loan for bells and whistles you don’t really need. When considering these home loan options you should consider these important points:
Home Loan Redraw
Lets you make extra repayments directly into your loan, helping to drive the principal down faster. This reduces the interest you’re charged each month, allowing you to channel more money into cutting the principal loan amount further.
Unlike some basic home loans, you can redraw additional repayments if required, to cover school fees for example, without having to refinance your loan. While this offers a degree of flexibility, a redraw can be more expensive: you can often incur fees for each withdrawal and may find that the amount or frequency for withdrawals has a cap.
This feature effectively allows you to save on the interest you are charged on your mortgage through offsetting its balance against your savings. For example, rather than earning a few per cent interest in a traditional savings
account, by placing your savings into your mortgage offset you are effectively saving whatever your current home loan interest rate.
You can also direct your salary into the account while servicing your bills and other debts as required. Mortgages that have an offset account attached to it usually charge a higher rate of interest, and often require a substantial amount of cash to remain untouched in the account to reap maximum benefits.
There are obviously pros and cons with both options; make sure you do your research or have your mortgage broker look at your situation before making a decision on adding a redraw or mortgage offset facility to your home loan.