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Redraw & Offset Explained

Redraw

Many house loans now include either an offset account, a redraw option, or both. If used correctly, both of these features can provide borrowers with flexibility and possible financial benefits.

Redraw allows you to access additional principal payments made on your loan. This could come in handy if you ever need some extra cash.

How does the redraw feature work?

Once you've established a routine for paying off your first mortgage, you may want to increase your regular payments over the minimum. Alternatively, you can also make additional payments from time to time. By contributing a little more, you may be able to pay off your house loan sooner by lowering the interest charged throughout the term of the loan.

However, life throws several surprises. Your vehicle may decide to pack it in. Or maybe you're just in desperate need of a vacation. This is where a redraw feature could come in handy.

If you've been making additional payments on your mortgage, a redraw facility allows you to take those excess payments back and utilize them as you see fit.

Here's an example.

Assume your mortgage's minimum monthly payment is $2,000.
You decide to pay an extra $200 per month, totaling $2,400 in a year.
This additional $2,400 may be available for withdrawal at a later date.

How do I redraw my money?

Redrawing funds from a qualified home loan is usually simple. While each lender may have various alternatives, most will allow you to request a redraw via online banking, phone, or branch visit

.

The minimum and maximum redraw amounts fluctuate amongst lenders.

Offset

An offset account is a transaction account that is tied to your mortgage. You can deposit and withdraw funds from it just like a conventional transaction account.

The main distinction is that by accumulating funds in an offset account over time, you can minimize the amount of interest charged on your house loan. The greater the sum and the longer the term, the lower the interest rate. This may allow you to pay off your loan sooner.

In general, the offset option is only accessible on variable-rate mortgages (although some lenders offer an offset feature on selected fixed-rate home loans).

How does an offset account work?

Assume you get a $500,000 home loan.
You then make a $20,000 deposit into your offset account.
You will now be charged interest on $480,000 rather than the entire $500,000.
This will continue as long as $20,000 remains in your offset account.

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