Which is better? Offset or Redraw?
Firstly what is the difference between the two?
Offset vs Redraw
Offset accounts are like everyday transaction accounts, giving you easy access to your money at any time. The offset account is a separate account that sits outside of your mortgage.
Money that you have sitting in the offset account will be "offset" against the mortgage.
For example, if you have a $300,000 loan with $10,000 sitting in the offset, you will only be paying interest on $290,000.
Most offsets attract an annual fee of anywhere between $200-$400, payable on the anniversary of your loan.
Redraw facilities let you access extra repayments that you have made on your home loan over and above the required payment from the bank.
They are not a separate account, but you will see how much money you have in the redraw as your mortgage will be in credit.
Which is better? Both can help reduce the amount of interest you pay on your home loan but there are a few slight differences. Offsets are the most easily accessible, acting in the same way as a normal transaction or savings account. You can move money in and out by utilising your banking app, the same as you other accounts.
Redraw can have a few more restrictions. Your lender may have minimum redraw amounts, delays in the funds being moved ie not instantaneous, or having to phone the bank or fill in a form to access the funds.
If you have an investment property, there are also tax implications to consider. If you bring the loan balance down through extra repayments in a redraw facility, you will not be able to claim these extra repayments as tax deductions, unless you can demonstrate that use of these funds is still for investment purposes. If those funds were sitting in the offset account instead, the full loan balance is always tax deductible.
Speaking to a mortgage broker can help you decide which is the best repayment type for your circumstances. There are so many variables to consider and making the wrong decision can hinder your chances of borrowing down the track.
If you would like more information, please book in a time to speak with a Cobblestone Mortgage specialist.