Redraw facilities and offset accounts let borrowers use their spare cash to whittle away the mortgage. But which option offers the biggest savings?
By Chris Walker
December 1, 2009
When you’re paying off a home loan, it doesn’t always make sense to hold savings in an interest-bearing account. Interest earnings in deposit accounts are fully taxable, and depending on your personal tax rate that could mean losing up to half your return to tax.
Putting your savings to work by paying off the mortgage may offer better value. Offset accounts and a redraw facility are useful options that let homeowners save on mortgage interest while still providing access to spare cash.
The two work quite differently. A redraw facility lets borrowers withdraw additional payments made on the mortgage.
By contrast, an offset account is a savings account linked to your loan. Instead of earning interest on the savings, the balance of the offset account is deducted from the loan principal when interest is calculated.
For example, if you hold $20,000 in an offset account and have a $300,000 mortgage, the loan interest will be based on a balance of $280,000 ($300,000 less $20,000). It’s a very tax-friendly way to use your savings.
Offset mortgages can come with a higher rate, which will reduce the impact of the offset in trimming mortgage interest unless you have significant savings. By shopping around it is possible to find a low interest mortgage featuring an offset account.
Many home loans that offer offset accounts will not be offset 100 percent, which means you will not be able to have the full value of your loan sitting in the offset account, or you could be charged hefty fees in doing so. This is why it’s best to check the maximum percentage of loans you are permitted to have in the offset account.
Offset accounts typically provide ATM access, making it easy to dip into your savings. A redraw facility may offer less of a temptation as it can take 24 hours to claw back your extra payments. However borrowers need to be mindful of redraw fees. On some National Australia Bank and Commonwealth Bank mortgages for instance, borrowers can pay around $50 per redraw.
There may also be restrictions on the number of redraws, or volume of funds withdrawn via redraw, each year. That’s not such a bad thing. Regarding a redraw facility as an ‘emergency only’ option will ensure your spare cash does the job of paying off your mortgage sooner.