Offset vs Redraw
Which is Right for You?
When it comes to managing your mortgage, understanding the difference between an offset account and a redraw facility can help you make the most of your financial situation. Both options offer unique benefits, but which one is right for you? Let’s dive into the details.
What is an Offset Account?
An offset account is a transaction account linked to your mortgage. The balance in this account offsets the amount you owe on your mortgage, reducing the interest you pay. For example, if you have a $500,000 mortgage and $50,000 in your offset account, you’ll only pay interest on $450,000.
Benefits of an Offset Account
- Interest Savings: Reduces the amount of interest you pay over the life of your loan.
- Flexibility: Access your money anytime without affecting your mortgage.
- Tax Efficiency: Interest savings are not considered taxable income.
This open is generally the most ideal if you are ever looking to rent out your property or utilise a debt recycling strategy. This is because a redraw facility may decrease the future tax deductibility of your mortgage which could end up costing you thousands of dollars in tax deductions.
What is a Redraw Facility?
A redraw facility allows you to make extra repayments on your mortgage and then access those funds if needed. This can be a great way to reduce your loan balance faster while still having the flexibility to use the extra funds.
Benefits of a Redraw Facility
- Interest Reduction: Extra repayments reduce your loan balance and the interest you pay.
- Access to Funds: Withdraw extra repayments if needed, usually with some restrictions.
- Discipline: Encourages regular extra repayments, helping you pay off your loan faster.
This is a great way to repay your Principal Residence mortgage which you will be staying in as a forever home.
Offset Accounts Explained
- Pros and Cons: Pros include interest savings and flexibility; cons may include higher fees.
- Choosing the Right Option: Consider your financial situation and goals to decide if an offset account is right for you.
Redraw Facilities Explained
- Pros and Cons: Pros include interest reduction and access to funds; cons may include withdrawal restrictions.
- Choosing the Right Option: Evaluate your need for flexibility and discipline in repayments to determine if a redraw facility suits you.
Conclusion
Both offset accounts and redraw facilities offer valuable benefits for managing your mortgage. By understanding how each option works and considering your financial goals, you can choose the best strategy to maximise your savings and achieve financial success.
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Please note that this article is intended to provide general information only and does not take into account your individual objectives, financial situation or needs. You should assess whether the information is appropriate for you and seek professional advice before making any investment decision.
This information is true and correct as of 12 October 2024, prior to making any changes we recommend you read Government resources and seek Financial Advice prior to making any changes.