Wanting to make your money work harder for you? We have a few options.
If you have the ability to be more flexible with your finances, there are two features (some fees may apply) that are available to minimise interest – an offset account and redraw facility. We’ll explain in more detail below.
Offset Account
Offset accounts are a savings/transaction account that is linked to your home loan account. The balance of this account ‘offsets’ against the balance of your loan before interest is then calculated, reducing the amount of interest you pay.
How does it work?
If your home loan balance is $420,000 and you have $20,000 in a linked account, you only pay interest on on the balance of $400,000.
Benefits
- Easy, convenient and flexible. Works just like any other account, with direct access to your money
- Some lenders offer up to 10 linked offset accounts – so you can “bucket” your savings and finances as you wish
- Can save you more offsetting interest than in a separate saving account
Considerations
- There is usually an annual (package) or monthly fee to have this feature included.
- Depending on your savings balance, it may not outweigh the fee
- May not all be 100% offset and only partially
Scenario – Benefits of an offset account
Barry and Jo have a home loan of $500,000 at 6%. They have an offset account with $50,000 of savings.
With the value of their offset account, they would save on average $3,000 of interest over a 12 month period. Over a 30 year loan term, this would reduce their loan by 5 years, down to 25 years. The more in offset, the more you save and can reduce your loan term downn.
Redraw Facility
A redraw facility gives you the option of making extra repayments on your loan, but then the ability to withdraw them. You can only withdraw the ‘extra’ you have paid into the loan account.
How does it work?
If your minimum monthly repayments are $1,800 per month and you pay $2,000 every month for 12 months, you will have paid an extra $2,400. Having a redraw facility would generally allow you to access the ‘extra’ $2,400 you have paid – without changing your monthly repayments.
Benefits
- Access to funds if unexpectedly needed and don’t require regular access to the funds
- Saving money by paying less interest, instead of having it in a separate savings account earning minimal interest
Considerations
- Extra funds need to be transferred back to a transaction account to utilise them
- Fees – some lenders may charge a fee per redraw that is made
- There may be a minimum or maximum amount that can be redrawn at any one time
Summary
The choice between an offset account/s or redraw facility comes down to how accessible you wish your money to be.
Using an offset account will allow funds to save you interest as soon as it hits your account and allows easy access to funds. But you will likely pay a fee.
Using redraw will still allow you to use your savings to reduce interest, whilst likely avoiding fees, but will involve more active management to ensure your funds are working for your.
Check out our Home Loan Offset and Extra Repayment Calculators to see how they can make a difference to your loan.
This page provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.
