Minimising Interest – Offset and Redraw Facilities

The Hidden Ways To Reduce Monthly Repayments:

We as homebuyers who have relied upon mortgages to help purchase property are always looking for ways to minimise our monthly repayments. The common strategy is refinancing to cheaper loans, however lesser known options are to utilise offset accounts and redraw facilities which can either fully remove, or minimise the interest charged to borrowers.

Offset Account:

An offset account is linked to the home loan. The cash balance in the offset account reduces the interest charged per period (week/month). The cash sitting in the offset account acts as a reduction in the outstanding mortgage balance owing. Although this cash does not ‘pay off’ the loan, it’s effectiveness comes from the fact that the lender will charge you interest based on the offset-cash inclusive mortgage balance. The ‘lower’ mortgage balance means interest charged every month/week will be lower than it normally would if there was no offset account.

Offset Accounts are essentially a transaction account, meaning borrowers can elect for their salary to be paid into, as well as make payments from the account. As a result, offset accounts are a flexible and simple way to lower interest charges, allowing borrowers to save by paying the loan off quicker, as well as receiving tax benefits as the money saved is not considered income.

To Consider:

Offset accounts are generally an extra feature that can be chosen on top of regular loan products. Because of the extra administration for the lender that comes with offset accounts, mortgages with this feature often charge a slightly higher interest rate compared to the ‘basic’ loan counterparts. Homebuyers should contact their mortgage broker to determine if they are in a position to utilise the offset account in the near future or whether a basic loan in the short term will be cheaper.

Redraw Facility

A redraw facility allows borrowers to make extra repayments toward their home loan. These payments can be redrawn at any time for personal use as the balance is recorded by the lender. Utilising spare savings, borrowers can make extra repayments toward their mortgage, reducing the interest charged every period, resulting in savings over the life of the loan.

To Consider:

Redraw facilities are not as clear-cut as offset accounts, as lenders may impose limits on the amount and size of redraws. There may also be fees and delays as a result of redrawing extra payments.

Reach out to the Chiefs if you have any questions! We help clients determine their borrowing capacity within a day and provide advice on purchases or refinances, all with zero-fee mortgage broking!