27 May What’s Better? Redraw or Offset Account
While most of the time investors focus on the interest rate they are paying on their mortgage, they can often be missing out on some huge savings just by structuring their loans a little differently.
One of the main ways to do this is focusing on how you manage your spare cash.
Do you use it to pay off the mortgage faster or do you set it aside for a rainy day?
A good mortgage broker in Melbourne can really help you with this and in the current environment, we can see why having access to that spare cash is a very valuable thing.
Most first home buyers and investors, quite often take out a very simple P&I loan. They make their payments each month and in doing so pay off the interest and a portion of the principle.
Some of these types of loans give you the ability to redraw any payments you make should the need arise. So let’s say you get a $10,000 bonus and put that into paying off your mortgage, should you need to access that money at some point in the future, theoretically, you can.
It should be a part of the redraw feature. However, by doing this, you are effectively putting control of that money back in the hands of the lender.
As we’ve seen in the current environment, the rules around what borrowers can and can’t do can change quickly. That’s been highlighted by one lender recently, lowering the amount their redraw customers can access, without informing them.
A good mortgage broker in Melbourne will tell you that it is far better to be in control of your own destiny and as such, you should probably be considering a loan product that has an offset account attached to it.
An offset account is effectively just a transaction account, however, it has one huge advantage. It attracts interest at the same rate as your mortgage. So that alone makes it a powerful tool, in an interest rate environment like we are in currently that makes savings accounts a virtual zero-sum game.
Redraw facilities and offset accounts both work the same way in that they reduce the interest bill on your loan. And as we know, paying off your mortgage sooner will likely save you thousands of dollars in additional interest payments.
However, you’re getting that additional flexibility when you use an offset account. There are also scenarios where you might be charged a fee to access the redraw facility.
On the flip side, not all offset accounts are created equally. The most effective type of offset account is the 100% offset account. It’s important to note that there are some that offset of less than 100% of the mortgage. In certain circumstances, mortgages with a 100% offset account can attract higher interest rates, but that’s something a good mortgage broker in Melbourne can help you with.
At the end of the day, we are clearly seeing how advantageous it is to have some money tucked away for a rainy day and generally speaking an offset account it the very best way to do that.
If you haven’t got a 100% offset account as a part of your loan product, please give us a call on 0488 814 148 and we’ll be able to give you some options to free up money in case you need it.