These can be daunting questions if you’re new to the investing game or even if you’ve had your home for a while. We’re here to help! Here are the pros and cons of both facilities and what you need to know when you’re considering you’re loan options.
What is redraw? How does it work? Is it the best option for you? These are the questions so many of us ask… so here are our answers!
Redraw gives you the ability to draw funds out of your home loan when you’ve paid more than the normal repayments. In other words if your repayments are $2,000 a month and you’re paying $3,000 a month, then you’re able to build up available funds in your loan and take them out. Generally, these funds can be taken out with no charge. So if you have no other loans to pay off and you’re saving for a big expense like a holiday or a car we recommend you save that money in your home loan account and redraw.
Sounds like nothing but exclusive benefits, so when should you avoid using a redraw account? When you have other property investments redraws can be a bit temperamental. Redrawing from an investment loan can affect the interest tax deductibility. You may also want to steer clear of redraw accounts if you’re not an excellent saver. If you’re not sure you’re a great saver there are other options that may work better for you.
In the battle of offset versus redraw, redraw wins the round for easy to explain. Offset accounts can be a little more complicated. But if they’re used properly you could be reaping the rewards!
Offset accounts are a wonderful innovation with extra availability in Australia. Lots of banks in Australia offer this feature, but they’re much less accessible overseas. So what are they and how do they work?
To put it simply… an offset account is an account that’s linked to your home loan with surplus funds offsetting the interest in the loan. A little confusing, but we have an example. If your loan is $100,000 with $10,000 in your offset account, you’re only paying interest on $90,000. That can really reduce your interest repayments and save you money in the long run!
How do repayments work?
The repayments can be a little out of the box, and depend on your loan arrangement. Your repayments are going to be different if you have an interest only or principal interest loan.
For an interest only loan you’ll get dollar-to-dollar matching. So if you have $10,000 in your offset account with an interest rate of 4.5%, you’ll save about $450 a year. That’s some great savings right! You’re only paying the interest on the loan so as your offset account fluctuates so do your repayments.
Now lets talk about principal interest. In this case with all the funds in your offset account your minimum repayments would still stay the same. But you’re chipping away at the principal of your loan a lot quicker! In other words if your repayment is $2,000 a month, it will stay $2,000 a month whether you’ve got $1 or $20,000 in your offset account. But the more money you have in your offset account the larger the portion of the repayment is going towards paying down the principal of the loan rather than the interest. You’re really just paying your home down sooner.
What are the benefits?
An offset account is a great idea when you have surplus funds or great saving abilities. It can also be a great money saver if you’re self employed. If you’re paying GST and tax annually, or quarterly, it can be a great idea to stack those funds in your offset account until they’re due. Make that money work for you for as long as you can. Your interest is calculated daily so it doesn’t matter how short it’s stay in your account is, any extra funds will deliver savings.
The interest saved compared to the interest earned on a savings account can be substantial. The interest rate on your loan will always be higher than the one on your savings account. It can be harder to see because you’re not gaining funds, but you’re definitely saving more in the long run.
The benefits just keep coming. You can have more than one offset account! You can separate the account like you would online banking and have your designated funds. This makes it easier for you to control your money and limit your own access to align with your financial goals.
What do they cost?
Everything sounds great until you read the fine print and there’s a cost involved right! There is a fee to set up an offset account which is generally around $400 to $500. This will usually include the professional package with your lender. There are some exceptions. Some lenders will have offset accounts on basic loan products, but if your offset account is linked to an investment loan you could get the payment back with tax.
Setting up a redraw account is generally free! But if you’re planning to use the facility it’s important you ask some questions before you set it up. Sometimes you won’t find a set up fee. But there could be a fee associated with withdrawing and rules around when you can take money out. You lender will be able to answer all these questions before you decided to set it up.
Offset versus Redraw for saving?
This is the golden question! And we have no direct answer… it completely depends on you! If you feel you’ve got surplus funds and offset account is a great way to go. When you use an offset in the right way it can really work for you and your money.
We want you to remember that no mater what your situation it’s important to get the right professional advice. You need to have peace of mind knowing your loan features work for you.
If you are looking for personalised advice about your options in an offset versus redraw showdown contact Rise High here or leave your details below and we’ll get back to you!