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When managing a mortgage, understanding the financial tools available can significantly affect your savings and overall financial health. Two popular options in Australia are the offset account and the redraw facility. This comparison will help you grasp their benefits and features, allowing you to make an informed choice.

What is an Offset Account?

An offset account is a transaction account linked to your mortgage. The balance in this account offsets the amount of your mortgage when calculating interest. For example, if you have a mortgage of $300,000 and an offset account with $50,000, you will only be charged interest on $250,000.

How Does an Offset Account Work?

The offset account functions similarly to a regular bank account. You can deposit your salary, pay bills, and withdraw funds as needed. However, the key feature is that the balance in this account reduces the principal amount on which interest is calculated.

Here’s how it works in a simple breakdown:

• Linked to Mortgage: The account is directly linked to your home loan.
• Interest Calculation: The lender calculates interest on the mortgage balance minus the offset account balance.
• Savings on Interest: By keeping money in the offset account, you reduce the interest payable on your mortgage, potentially saving thousands over the loan term.

Benefits of Using an Offset Account

• Interest Savings: The primary advantage is the potential reduction in interest paid over the life of the loan.
• Flexibility: You can access funds at any time without penalty, much like a regular bank account.
• Tax Benefits: Interest savings from an offset account are not taxed, unlike interest earned on savings accounts.
• Mortgage Reduction: It can help you pay off your mortgage faster, as less interest accrues.

What is a Redraw Facility?

A redraw facility allows borrowers to access extra repayments made on their mortgage. If you pay more than your required monthly repayment, you can "redraw" those extra funds when needed.

How Does a Redraw Facility Work?

The redraw facility operates as follows:

• Extra Repayments: You make additional payments beyond your required mortgage repayments.
• Accessing Funds: If you need cash later, you can withdraw the extra amount you’ve paid into the mortgage.
• Interest Impact: The borrowed amount remains on the mortgage, meaning you will continue to pay interest on the entire mortgage balance.

Benefits of Using a Redraw Facility

• Access to Extra Funds: It provides access to funds without needing to refinance or take out a personal loan.
• Lower Interest Rates: Since the redraw amount is part of the mortgage, it generally attracts a lower interest rate than other forms of credit.
• Control Over Payments: You can choose to make extra payments for better financial control, knowing you can access it later if needed.

Offset Account vs Redraw: Key Differences

When comparing offset accounts and redraw facilities, understanding the key differences can help you choose the right option for your needs.

Interest Savings Comparison

• Offset Account: Interest is calculated on the mortgage balance minus the offset amount. This can lead to significant savings on interest payments.
• Redraw Facility: The entire mortgage amount accrues interest, but you can access funds that you've overpaid.

In many cases, an offset account offers better long-term savings on interest due to its direct impact on the interest calculation.

Accessibility of Funds

• Offset Account: You can access your funds anytime without restrictions. This allows for more flexibility in managing your finances.
• Redraw Facility: While you can access overpaid funds, there may be conditions or fees associated with withdrawals, limiting immediate access.

When to Choose an Offset Account

An offset account may be ideal for you if:

• You prefer flexibility in accessing your funds.
• You want to save on interest while maintaining access to cash.
• You have a consistent income and can keep a healthy balance in your offset account.

When to Choose a Redraw Facility

Consider a redraw facility if:

• You are disciplined with your spending and can make extra repayments without needing immediate access.
• Your financial situation may require accessing funds infrequently.
• You want to lower your overall mortgage balance while having the option to access funds later.

Conclusion: Offset Account vs Redraw for Your Needs

Choosing between an offset account and a redraw facility ultimately depends on your financial habits, needs, and preferences. An offset account offers greater flexibility and immediate interest savings, while a redraw facility can help you manage your mortgage effectively if you often make extra repayments.

By understanding the differences and benefits of each option, you can make a more informed decision that aligns with your financial goals.

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FAQs

• What is the main difference between an offset account vs redraw?

The main difference lies in how interest is calculated and the accessibility of funds. An offset account reduces the mortgage balance for interest calculations, while a redraw facility allows you to access extra repayments made on your mortgage.

• Which is better, an offset account or a redraw facility?

It depends on your financial needs. An offset account typically offers more flexibility and interest savings, while a redraw facility is useful for those who can make extra repayments but may not need immediate access.

• Can I have both an offset account and a redraw facility?

Yes, many lenders allow borrowers to have both options linked to the same mortgage, providing maximum flexibility.

• Are there fees associated with offset accounts and redraw facilities?

Fees may vary by lender. It’s important to check the terms and conditions of your mortgage to understand any potential costs.

• How much can I save with an offset account vs redraw?

Savings will depend on your mortgage amount, interest rate, and how much you keep in the offset account. Generally, the more you have in the offset, the more you save on interest.

• Is an offset account taxed?

No, the interest savings from an offset account are not taxed, which can make it a more attractive option compared to a regular savings account.

For more detailed information, you can visit Moneysmart or the Australian Securities and Investments Commission (ASIC).

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