Redraw vs. Offset: Understanding Your Mortgage Cash Flow Options
Redraw vs. Offset
If you have a variable rate mortgage, you may have heard about using an offset account or redraw facility to help boost your cash flow. But what is the difference and which is better for you? Here at Investors Mortgage, we want to provide clear guidance on making the right choice to benefit your mortgage and finances overall.
Offset:
Offset is a mortgage feature where a separate savings or transaction account is linked to the mortgage. Money you hold in the offset account is deducted from the remaining loan principal used to calculate daily interest, effectively "offsetting" the debt. For example, if you have $50,000 in an offset and a $300,000 loan balance, your daily interest is only charged on $250,000. Offsets deliver an easy way to reduce interest costs.
Pros:
Interest reduction : The more funds you keep in your offset account, the less interest you pay. Most interests are calculated daily on an offset account, so even if you draw funds from the account for your expenses you are still saving every time you put money in.
Flexibility : An offset account is just like an everyday transaction account, you can access your extra funds any time.
Cons:
Funds available : You need to have sufficient funds kept in the offset account to benefit from interest savings.
Limited availability : Not all mortgages offer offset features, and the terms can vary.
Fees : An offset account usually comes with a loan package which is likely to incur an annual fee.
Redraw:
The redraw facility allows access to extra repayments you’ve made towards your mortgage principal. For example, if you originally borrowed $300,000 but have now repaid the balance down to $250,000, you could redraw up to $50,000 for other purposes such as renovations or emergencies. Your balance goes back up to $300,000, along with more interest costs.
Pros:
Flexible access : Redraw provides you with the flexibility to access extra payments made on your mortgage when needed.
Financial control : You can better manage your finances by having access to surplus funds without the need for additional loans. Redrawing on your home loan is usually far cheaper than other debt options such as credit cards or personal loans.
Cons:
Limited availability : Not all mortgages offer Redraw, and it may have limitations on the amount and frequency of redraws.
Reduced tax benefits : Using Redraw may affect tax deductibility, depending on what you apply those redrawn funds to.
Redraw fees : Some lenders may charge you a fee every time you wish to redraw.
Key Differences and Benefits
Offset gives you an interest reduction without increasing debt, while redraw provides access to extra funds already repaid. Offset lets you keep equity, while redraw taps equity already built up. Balancing the two options lets you optimize both savings and access to cash as needed.
Get Expert Mortgage Advice
The choice between offset and redraw depends on your spending habits, finance needs and financial goals. Our highly experienced mortgage brokers can discuss which strategy delivers the biggest bang for your buck. To find out more or book an appointment, contact Investors Mortgage today.
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