The short answer is not much – more on this later.
An offset is a transaction account linked to your mortgage and has normal transaction account functionality.
The benefit is the cash in your account is offset daily against your mortgage balance, and this will decrease the loan interest charged accordingly. While most offset accounts offset your mortgage balance in full, some only offer a partial offset.
Garry and Tanya owe $200,000 on their home loan. They recently received a $10,000 cash windfall and put this cash into the offset account linked to their mortgage. Now the interest on the mortgage is charged against a balance of $190,000.
A redraw facility provides borrowers with access to money they have already contributed to their mortgage for use for other purposes such as a pool, an extension or renovation. This is not savings and consists of the extra payments a borrower made to paying down the mortgage.
As we said earlier, redraws and offsets have few differences apart from the access they provide to your lender. A lender is unable to access the funds in an offset account should you miss a repayment. On the contrary, they can dip into the redraw to make up any loan arrears.
The money in an offset account remains at call and is easily available, whereas the money in a redraw facility, while reasonably accessible, may attract a fee when you make a withdrawal. Also, some redraw facilities may not allow you to make a same-day withdrawal. Moreover, if you have a redraw facility with a spouse be sure to that it takes two signatories to access the funds to avoid nasty financial surprises.
Also, contrary to popular opinion, if you access the money in a mortgage offset or a redraw facility, you can potentially create a bigger debt for yourself. For example, if our couple Garry and Tanya withdraw the $10,000 in their mortgage offset, they will again pay interest on $200,000.
If you’d like to know more about mortgage offset accounts or loan redraw facilities, contact Our Broker today on 02 8232 0327.