When it comes to managing your home loan, finding ways to reduce interest payments and pay off your mortgage faster is always a priority. Two popular features offered by lenders are redraw and offset facilities. While both can help you save on interest, they operate differently and offer distinct advantages. In this post, we’ll explore the key differences between redraw and offset facilities to help you decide which option might be best for your financial needs.
What is a Redraw Facility?
A redraw facility allows you to access any extra repayments you’ve made on your home loan. When you make payments above the required minimum, these additional funds are applied directly to your loan principal, reducing the amount on which interest is calculated. The redraw facility gives you the flexibility to withdraw these extra payments if needed.
Key Features:
- Interest Reduction: Extra repayments lower your loan balance, which reduces the interest charged.
- Access to Funds: You can withdraw your extra payments, though some loans may impose limits or fees on withdrawals.
- Loan Principal: The extra repayments go directly towards reducing your loan principal.
What is an Offset Facility?
An offset facility is a separate account linked to your home loan. The balance in this account offsets your loan balance, meaning you only pay interest on the difference between the two. For instance, if your loan balance is $300,000 and you have $50,000 in your offset account, you’ll only be charged interest on $250,000.
Key Features:
- Interest Savings: The offset account balance reduces the loan amount on which interest is calculated.
- Easy Access: You have full access to the funds in the offset account, just like a regular bank account.
- Loan Structure: The loan principal remains unchanged, but the interest payable is reduced.
Key Differences Between Redraw and Offset Facilities
- Accessibility of Funds:
- Redraw Facility: Access to extra repayments may be limited by conditions such as minimum withdrawal amounts or fees.
- Offset Facility: Funds in an offset account are fully accessible at any time, without any restrictions.
- Impact on Interest:
- Redraw Facility: Extra repayments reduce the loan principal, leading to lower interest charges over time.
- Offset Facility: The offset balance directly reduces the interest payable, though the principal remains unchanged.
- Account Structure:
- Redraw Facility: Integrated within your loan account; extra repayments reduce the principal.
- Offset Facility: A separate account that offsets the interest calculation on your loan balance.
- Flexibility:
- Redraw Facility: May have limitations on how often and how much you can withdraw.
- Offset Facility: Offers greater flexibility, with no restrictions on accessing funds.
- Tax Considerations:
- Redraw Facility: Withdrawing extra payments for non-investment purposes could affect the tax-deductibility of interest on an investment loan.
- Offset Facility: Typically, using an offset account doesn’t impact the tax-deductibility of interest on an investment loan.
Which One Should You Choose?
The choice between a redraw and an offset facility depends on your personal financial goals and circumstances:
- Consider a Redraw Facility if: You want to focus on reducing your loan principal and are okay with some restrictions on accessing extra funds.
- Consider an Offset Facility if: You prefer having immediate access to your funds while still benefiting from interest savings.
Need More Information?
Deciding between a redraw and an offset facility can be a significant step in your financial planning. If you need more information or personalised advice, feel free to contact me. I’m here to help you navigate your options and make the best choice for your financial future.
