Getting a Home Loan in Australia if you're living overs...
29 Nov 2023
You might have heard of a home loan redraw or an offset sub-account before, but do you actually know what they are? Both are home loan features that you might find useful, so it’s handy to get your head around how they work and understand the difference between them.
If you’re paying off a home loan and you’re able to pay more than your scheduled repayments, doing so can reduce your loan term and shrink your interest bill. Interest is calculated daily, based on the principal amount owed remaining, so by paying off more of the loan, you are reducing your interest bill. Many home loans offer a redraw facility, which means you can take out (or redraw) any extra payments you have made if the need arises. You can use your redraw to pay your mortgage with the added security of knowing you can still take the money out.
For some borrowers, using a redraw facility can be a more cost effective option than a regular savings account, since interest rates on home loans tend to be higher than savings accounts. Let's say you have $400,000 outstanding on a 15 year home loan, at 8% p.a interest. Your monthly repayments would be $3,823, and the total interest charged for the remainder of the loan term would be $288,070. Now let's say you budget well, and after making your repayments and monthly expenses, you are left with $1,000 each month. You can either put this money into a savings account, paying 3% p.a, or make extra repayments to your home loan.
If you put $1,000 extra per month into your home loan, it may be paid off in 10 years and 2 months, and the total interest you paid will be reduced to $184,335, saving you $103,735 in interest payments. If you instead over the same time put this amount into the savings account, you would only earn about $20,000 in interest
An offset sub-account is a separate transaction account linked to your home loan that can be used like an everyday savings account to deposit money, save and make withdrawals. The balance on this account is used to ‘offset’ your total outstanding loan amount, which can mean you save on interest in the same way as redraw facilities. When your interest bill is calculated, whatever balance you have in your offset sub-account is subtracted from the total outstanding loan amount.
Both features allow borrowers to reduce the amount of interest payable on their home loan, and pay off their loan sooner. The main distinction is that funds kept in an offset sub-account are separate from your home loan, while a redraw facility is just a feature of the loan itself and any payments are subtracted from the outstanding loan amount. Below is a comparison that illustrates the differences between the two.
|Balance in redraw comes from the extra repayments you have made.||Offset sub-accounts work just like your everyday savings account. You can nominate the account to receive your salary, or to have payments debited from.|
|Funds in your redraw facility created by extra repayments reduce the interest amount on your home loan.||Money in your account offsets against the balance of your home loan, reducing the interest charged.|
|If you redraw on a home loan, the funds are transferred to a linked transaction account. Some lenders will impose minimum and maximum redraw limits, plus a limit to how many times you redraw a month. loans.com.au offers a completely free, unlimited redraw facility on all of our variable home loans.||Instant access to your day-to-day funds. Pay bills and credit card debt, withdraw cash at an ATM, use a debit card.|
|You can increase the balance in your redraw facility by making extra repayments manually using direct debit.||You can pay your salary into an offset sub-account to get the benefit of your income reducing interest.|
If you have a fixed rate home loan, your options are generally limited when it comes to adding a redraw facility or an offset sub-account. Fixed rate home loans are in most cases ineligible for linking to a redraw or offset sub-account, but this depends on the lender and their loan product capabilities. Very few lenders will offer a fixed loan with a redraw or offset facility. At the end of your fixed rate period, your loan will shift onto a variable interest rate. When this happens, you may be able to add these features.
If you are looking to refinance your home loan from one variable product to another, be sure to check to see if the lender offers redraw facilities or offset sub-accounts for the loan that best suits your financial situation.
Should you want to take advantage of redraw facilities or offset sub-accounts while on a fixed rate home loan, you will need to consider breaking the fixed term of your loan. Given you entered a fixed-term loan, you signed a contract agreeing on the period of time the loan would be fixed. Breaking the fixed term of your loan means you’re breaking this contract and as a result, the lender will require compensation for any loss - usually in the form of a fixed rate break fee or a switching fee, depending on your lender.
You might be eligible for a split home loan, where a portion of your loan is fixed, and a portion of your loan is variable, giving you access to a redraw facility and offset sub-account.
Choosing between redraw or offset sub-account will depend on what suits you and your financial situation best. The main difference between the pair is that an offset sub-account offers greater flexibility if you need to use the money you have accumulated. If you plan on regularly using these funds for everyday spending, an offset sub-account offers the freedom to do so, though often has either a fee or a higher interest rate attached. On the other hand, you might have a large saving goal (renovations perhaps, or a second property), so might appreciate the restricted access of a redraw. Some lenders allow you to have both on the same home loan.
You may want to consider independent financial advice such as consulting an accountant or home loan expert to determine which option is right for you.
At loans.com.au our offset sub-account is 100% offset, meaning we take into account all of your money in your offset sub-account when we calculate your benefit.
Our Smart Home Loan product is just one of our many products with the flexibility to add an offset sub-account with a VISA debit card included. Chat to one of our lending specialists to find out more or pre-qualify to get started.
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.