What is an offset account?

A mortgage offset account is a savings or transaction account that can be linked to your home loan. The balance in this account ‘offsets’ daily against the balance of your home loan before interest is calculated. An offset account can help you cut years off your home loan term and save money on interest.

For example, if you have a home loan balance of $250,000 and have $10,000 in your 100% offset account, you’ll only pay interest on a home loan balance of $240,000. Because your home loan interest is calculated daily, every dollar in your offset account can save you money in interest. That means more of your repayment goes towards paying down the principal, helping you to repay your home loan faster.

Types of offset accounts available

• 100% offset account: 100% of the funds in your offset account are applied against your home loan balance before interest is calculated.
• Partial offset account: A partial offset gives you a reduced interest rate on the part of your home loan equal to the balance of your offset account. This can be far less effective than a 100% offset account. Benefits of an offset account
• An offset account is easy to manage. Simply have your salary and any other income deposited into your account to have an immediate impact on the amount of interest you pay, as the interest on your home loan is calculated daily.
• An offset account offers convenience and flexibility should you need it, as the account allows transactions and transfers giving you the same accessibility as an everyday transaction account.
• Some lenders offer multiple offset accounts linked to your home loan, so you can manage your finances while still benefiting from the interest saved on your home loan. This can be a great way to save for big expenses such as a holiday or a new car while still saving on home loan interest.
• Offset accounts are usually part of a home loan package that incur an annual fee, lower interest rate and other product discounts could still help you save money.
• An offset account can be more beneficial than a savings account as the interest you may earn on a savings account is less than the interest incurred on a home loan. There will be no tax on the interest you earn and you’ll be building valuable equity on your property.

Things to consider

• There are many kinds of offset accounts, and the features will differ depending on the loan type and lender. For example, not all offset accounts are 100%, some may only be partial. Fixed rate home loans may only allow 100% offset for a set period, or other conditions may apply.
• You may incur monthly fees for having an offset account. It pays to look at the total charges associated with your home loan package to determine if having this product leaves you better off financially.
• Some lenders may require a minimum balance in the offset account.
• Weigh up the pros and cons carefully to decide if an offset account is the right product for your situation.

Redraw Facilities

A redraw facility is a loan feature that is usually available with variable rate home loans and some fixed rate loans. A redraw facility lets you access any extra repayments you’ve made on your home loan.

To use a redraw facility, you first need to make extra repayments, or regularly pay more money on top of your minimum loan repayment amount. Use our handy online calculators to find out how much interest you could save by making extra or larger than minimum repayments.

How a redraw facility works

If your minimum monthly repayments are $700 per month and you pay $900 for a period of 12 months, you will have paid an extra $2,400. A redraw facility would allow you to access the extra $2,400 you have paid.

Benefits of a redraw facility

• A redraw facility is a useful feature for those who want an emergency fund for unexpected situations or expenses and who don’t require regular or immediate access to their extra funds.
• A redraw facility can be an excellent savings tool. Any excess funds put into your home loan are earning the same interest rate being charged on your home loan. By comparison, savings accounts generally pay much lower interest rates.
• There may potentially be tax advantages when using a redraw facility. Interest earned on your savings account is considered income and may be taxable, whereas any interest that is saved on your home loan by having money in a redraw facility will not be subject to tax.

Things to consider

• Some lenders may charge a flat fee for having a redraw facility. This is known as an activation fee. Once the redraw facility is activated, you can use the redraw facility as often as you like.
• Some lenders may impose a fee for each redraw. This fee will vary between lenders and loans.
• Some lenders may offer unlimited free redraws while some lenders may only offer a few free redraws per year. Once the limit of free redraws is exceeded the lender might charge a fee for each additional redraw.
• Redraw facilities can have a minimum and maximum amount which can be withdrawn at any one time. While some will have no minimum set amounts, others may set the minimum redraw amount as high as $5,000.

Redraw verses offset

• Choosing between an offset account and a redraw facility on your home loan will depend on how accessible you need your money to be. You should also consider any associated bank fees with each facility.
• An offset account is a separate deposit account, whereas a redraw facility is not a separate account, but a feature attached to your loan.

Download our Offset Account Fact Sheet here

Vincents Lending Solutions Pty Ltd ABN 69 848 383 535 | Credit Representative 509289 is authorised under Australian Credit Licence 389328 Disclaimer: The information provided is of general advice only. We have not considered your financial circumstances, needs or objectives and you should seek the assistance of your Vincents Advisor before you make any decision regarding any products and services mentioned in this communication. Liability limited by a scheme approved under Professional Standards Legislation other than for acts or omissions of financial services licensees.

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