MORTGAGE offset versus mortgage redraw – many homeowners are unsure which option is better.
Any way that home loan customers can reduce the principal on their home loan will help bring down interest costs and put a bigger dent into their mortgage, but experts say the two types of facilities serve different purposes.
Analysis by financial comparison website RateCity found 69 per cent of all home loans have a redraw facility, while 40 per cent have an offset account. Some have both.
Offset accounts are used as daily transaction accounts and the balance is taken off the total loan amount, which reduces the daily interest charges.
National Australia Bank’s general manager of consumer, Melissa Reynolds, says both types of home loan facilities can be a great way for savvy customers to reduce interest costs.
‘An offset gives you day-to-day access to your funds. For example your pay and the daily balance in your offset is then offset against your home loan,” she says.
‘The reason a redraw account becomes more popular is because customers like to think they are building up the equity in their home loan and keeping it separate.
‘Because you have to access your redraw amount and then move it into your transaction account or other account and access that money through an ATM, then you are less likely to eat into that equity and into those funds.’
NAB figures show of all its home loans, 14 per cent have an offset facility and about 35 per cent have a redraw facility.
RateCity’s analysis found about one in five offset accounts are not 100 per cent offset and instead are only partially offset.
On the flip side, some redraw facilities have fees applied to make withdrawals, so consumers can get stung if they pull out funds.
RateCity spokesman Peter Arnold says offset accounts can be a good way to cut down interest costs but they can be tempting to dip into, given the ease at which they can be accessed.
‘An offset account is a good way to minimise your interest and offset every possible cent towards your home loan for as long as you need it,” he says.
‘For people with good discipline it’s a good way to do it, but it’s important you don’t dig in too much and defeat the purpose of having it. Whereas a redraw is what you’ll have as a safety net.’
ME Bank’s manager of products, Luke Easton, says for owner occupiers having an offset account or a redraw facility is critical.
‘They would be better off using these types of accounts to save, instead of taking out a savings account where you get paid interest and pay tax on it,” he says.