You might not be aware that a number of handy features are available with your home loan to help you manage it more effectively – the most common being mortgage offset accounts and redraw facilities.
Both features can make a significant impact as part of a mortgage reduction strategy, taking years off your mortgage and helping to save in interest repayments.
The basis for each technique is simple: by making extra repayments to your principal loan amount you will reduce the interest you are charged – thereby reducing the life of the loan.
While both offset accounts and redraw facilities can be effective mortgage reduction tools for many borrowers, you may find that you are paying a higher rate on your loan for bells and whistles you don’t really need. When discussing these options with your broker, here are some important points you’ll need to consider:
Redraw facility
Lets you make extra repayments directly into your loan, helping to drive the principal down faster. This reduces the interest you’re charged each month, allowing you to channel more money into cutting the principal loan amount further. Unlike a basic home loan, you can redraw additional repayments if required – to cover school fees for example – without having to refinance your loan. While this offers a degree of flexibility, a redraw is ultimately more expensive: you can often incur fees for each withdrawal and may find that the amount or frequency for withdrawals has a cap. Additionally, you will need to exercise restraint from redrawing amounts too frequently as you may actually extend the life of your loan.
Mortgage offset
This feature effectively allows you to save on the interest you are charged on your mortgage through offsetting its balance against your savings. for example, rather than earning a few percent interest in a traditional savings account, through placing your savings into your mortgage offset you could save between six and seven percent interest – the average standard variable interest rate charged on a home loan. You can also direct your salary into the account while servicing your bills and other debts as required. Mortgages that have an offset account attached to it usually charge a higher rate of interest, and often require a substantial amount of cash to remain untouched in the account to reap maximum benefits.
There are obviously pros and cons with both options: if you have any further questions or would like to talk through your objectives before making a decision on adding a redraw or an offset facility to your mortgage please feel free to give us a call at Econ Financial Services a call on 02 9266 2266.
| Feature | Pros | Cons |
| Redraw Facility | Gives you the flexibility to add or withdraw repayments at any time | A higher rate of interest and additional fees can add up |
| Mortgage offset | Allows your working capital to shrink the interest charged on your loan | Borrowers may need to keep a substantial amount of cash in the offset account in order to be rewarded |
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