How can I save money on my home loan?
Two common features of home loans are offset accounts and a redraw facility. Both work by reducing the amount of interest payable on your loan by using any cash you have in the facilities, to reduce the amount interest is calculated on.
Redraw and offset accounts
Redraw facilities allow you to deposit spare income into your home loan account, allowing you to redraw a sum equal to the extra repayment amounts in future.
In the meantime, the extra money paid will lower the amount of interest charged while still giving you access to your money.
However, there may be restrictions on how much money can be withdrawn and when.
It is important to find out how a loan’s redraw facility works before taking it on, as the fees and restrictions attached might outweigh the benefits of interest savings. A lot of lending institutions only allow redraw on loans with a variable interest rate but can be a little more restrictive in terms of what they will allow to be redrawn on a fixed interest rate.
Deciding between an offset account and a redraw facility on your home loan largely depends on how accessible you need your extra money to be.
Offset accounts are like savings accounts that function alongside your home loan. Instead of earning interest on the money in the account you reduce the amount of interest you pay on your home loan.
If you assume you could earn 3% per annum on your savings in a savings account but are paying 5% in interest on your home loan balance you are going to effectively have more money in your pocket by reducing your interest bill.
With 100 per cent offset accounts, you reduce the amount of interest equal to the interest you are paying on your loan. Rather than earning savings account rates, you are reducing home loan account interest payable on the money held within the offset account.
If you had $10,000 in an offset account that was linked to your home loan of $500,000, instead of paying interest on $500,000 you are only charged interest on $490,000.
Offset accounts may have fees attached but this is not always the case. It is best to talk to your mortgage broker about this to see if we can find you the right loan arrangement for your needs. If you must pay a fee for an offset account, I can calculate the amount you would save by having the offset feature and advise whether you are financially better off or not.