First home loan: Offset account or Redraw facility?
Mortgage offset or mortgage redraw – many first home buyers are unsure which option is better when it comes to choosing the features of their first home loan. In this special feature, we take a look at some of the differences between the offset account & redraw, assisting first home buyers to determine which feature is better for them.
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What exactly is an ‘offset account’?
A Mortgage offset (also known as an offset account, or 100% offset home loan) is a transaction account which is linked to your home loan and has normal transaction account functionality, just like your current transaction account where your salary is deposited and where your bills are paid from. The money sitting in your account is offset daily against your loan balance, and this reduces the amount of interest charged on your next repayment.
What exactly is a ‘redraw facility’?
A redraw facility (also known as mortgage redraw) allows you to contribute or transfer extra funds directly into their loan. This feature enables you to withdraw money they have already contributed to pay off their loan. The available balance of the redraw facility is made up of the extra payments you have already made towards paying off your loan, in addition to the minimum repayments on your first home loan.
The benefits of an offset account
There are several advantages associated with having an offset account. Some of the main advantages include:
- Almost all Australian lenders are offering some sort of product with an offset account
- An offset account works automatically, it doesn’t require you do any manual transfers
- The interest savings on an offset account are calculated on a daily basis, helping you reduce your interest expenses
- If you are a first home buyer looking to make your first home an investment property in the future, by saving your extra money in an offset account (rather than paying straight into the loan and redrawing later) is considered a better tax strategy
- Allows you to save more interest than if you parked the money in a savings account – as home loan rates are significantly more than the savings accounts rates
- You don’t pay any tax on the interest you save using your offset account
- Most banks will tend to offer an offset account with a low annual fee, which covers our loan, offset account and credit card (if applicable)
- Some lenders even offer an offset account on a fixed rate loan (while most lenders don’t offer a redraw facility on a fixed rate loan)
The benefits of a redraw facility
There are also some advantages associated with choosing a loan that only offers a redraw facility. Some of the main advantages include:
- It reduces the amount of interest you have to pay on your home loan
- A loan with redraw facility usually comes with lower interest rates, rather than a loan with an offset account which usually attracts higher interest rates
- Allows you to draw out the money in the future if required for an emergency or to purchase luxuries such as cars
- Provides peace of mind as you can visibly see your loan balance reduce
- If you have a redraw facility, the lender will allow you to close that redraw limit at any time to reduce the repayments for the remainder of your life term – especially beneficial when you have children
Is there a difference in interest rates?
In the case where you have selected a variable rate with an offset account, the lender will most likely also provide with the redraw facility, allowing you to have the best of both features.
The interest rates offered on a basic home loan (without an offset account) tend to be lower than the interest rates offered on a home loan with an offset account. Lenders tend to charge a premium (through higher interest rates) when offering the additional benefit of an offset account – as we saw above, offset accounts offer greater advantages to most borrowers.
As of 28 April 2018, the following interest rates are available when comparing offset account loans to loans that only offer a redraw facility:
Best available variable rate with an offset account (borrow up to 80%) – 3.49% (Comparison rate 3.91%)
Best available variable rate with a redraw facility (borrow up to 80%) – 3.49% (Comparison rate 3.91%)
Best available variable rate with an offset account (borrow up to 95%) – 3.79% (Comparison rate 3.79%)
Best available variable rate with a redraw facility (borrow up to 95%) – 3.68% (Comparison rate 3.69%)
Which feature is best for my first home loan?
Whether you should opt for a loan that offers an offset account or redraw facility, or even both depends on a few factors. Some of these factors include:
- Your future intentions for the property (i.e. do you plan to live in it or do you plan to convert it to an investment property in the future and buy another home for yourself)
- Whether you have chosen a fixed rate or variable rate loan
- Your savings patterns
- The ability to make additional repayments beyond the minimum
- Changes in your future family situation
Rather than guess, it is a good idea to speak with an expert in this field. At FHBA Mortgages, our FHBA Brokers/Coaches are experienced with all types of home loan features and can help you decide which feature is best for you.
If you want to start your first home buying journey today or if you would like a complimentary chat with a first home buyer broker to discuss your scenario, please complete the form below:
First Home Buyers Australia