First off, what is an offset account or redraw offset facility? An offset is a facility linked to your home loan and essentially functions as any other normal transaction account would by allowing the withdrawal and depositing funds. The difference between a bank account and an offset facility is that unlike a bank account, an offset facility doesn’t earn an interest rate per-say.
Instead, the money in this facility is ‘offset’ against your home loan debt when interest is calculated, reducing the amount of interest charged on your home loan. Offsets are popular amongst most buyer groups as they can greatly reduce the interest paid over the life of the loan.
Offset accounts can be a much more beneficial place to store your savings than a standard savings account. This is because you might only earn a marginal amount of interest in a savings account and as such, money tends to work much harder in an offset account.
An offset works by only charging interest on the net balance in your home loan, being the loan balance minus the amount in the redraw offset facility. To illustrate, you have $10,000 in your savings account, and you owe $400,000 in your mortgage, the interest on your home loan will be calculated on $390,000. In other words, the money you have in your offset is deducted from the balance of your home loan - assuming you have a 100% offset.
Your monthly repayments will still be the same, but more of it will go towards paying off the principal of your home loan rather than the interest. An offset account helps you pay off your mortgage quicker with less interest, while having the ability to access the money you have in your account.
While offset can be very effective as shown above, this only works if you keep the money in there. If you take the money out for any reason - whether that’s to pay for a renovation, an existing debt or a big life event - then that amount of money you’ve taken out will be re-added to the loan balance.
For example, if you withdrew $20,000 from the $50,000 in your offset facility, then instead of paying interest on $350,000, you’d now be paying interest on $370,000.
An offset can help you to pay off your home loan faster. This works whether you’re an investor or a home buyer.
Since an offset is an everyday transactional account, it is very easy to withdraw money as you need it. You can ask your employer if they can put your salary into your account or redraw offset facility.
The money works harder in an offset facility than a standard bank account.
An offset can be a much more beneficial place to store your savings than a standard savings account.
Savings accounts and other bank accounts tend to have very low interest rates, whereas your offset facility will reduce your loan balance on a home loan that, in most cases, will have a higher interest rate than a savings account. While you might only earn a marginal amount of interest in a savings account, that money tends to work much harder in an offset facility.
It can also be more tax-effective to use an offset facility. Interest earned in a savings account is usually taxed at your marginal tax rate as it is considered income, while you aren’t actually earning anything in an offset facility. So in addition to saving money on your loan, you can also pay slightly less tax.
loans.com.au offers the feature of a redraw offset facility with our home loans. This loan includes unlimited, fee-free redraws, no monthly or ongoing fees, full access to your money in the redraw offset facility via a free VISA debit card and more.
Speak to one of our lending specialists on how you can benefit from a redraw offset facility. Use the button below to pre-qualify and schedule a call.