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You could save many thousands of dollars over the term of your loan by utilising either an offset account or a redraw facility, but how do you choose which one suits you the best?
The functionality of a mortgage can be determined by many things, such as; your net disposable income, financial goals and your ability to stick to a budget. Attaching an incorrect facility or account can mean all your hard work has amounted to very little or worse, it could cost you.
Offset accounts and redraw facilities do have their advantages to the way you choose to use your mortgage and if used correctly, can be very powerful tools to help reduce your debt levels and create wealth.
Below are some key points to consider as both will allow you to reduce the amount of interest you pay on your mortgage.
A redraw facility is generally a free function of your loan and it would be found sitting within a basic loan product as an additional feature.
A redraw facility allows you to make extra repayments against the principle value of the loan, therefore, reducing the amount you owe the bank. This reduction in principle is what drives your interest payments down each month.
Redraw facilities will charge you a fee to access the amount of available redraw that you have collected through extra payments and they will most likely set a minimum redraw amount.
The offset account sits alongside the mortgage without reducing the principal amount owing to the bank. Linking the account to the loan amount effectively reduces the interest payable on the loan account each month.
An offset account is typically a function of a packaged loan that comes with an annual fee. These packaged loans will come with interest rate reductions based on loan amount and your loan to value ratio, it's also common for a credit card to form part of the package.
Offset accounts will allow access to your available money for free as long as you utilise your funders ATM points and they set no minimum requirement.
You can change from loan product to loan product as your circumstances change however most lenders will charge you a premium to do so. It is important to remember that when deciding which option suits you best consider not only what you need from your mortgage now but also what you need from your mortgage into the future.