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Offset vs Redraw

Offset vs Redraw

WHAT IS AN OFFSET ACCOUNT?

This home loan feature is operated in concurrence with your home loan account. They function the same way as a regular savings or transaction account meaning you have immediate access to your funds and on many you can earn interest comparable to a standard savings account. The interest earned is then deposited into your home loan account which reduces the account balance and in effect then reduces the interest you pay. In addition the interest earned is not taxable.

Example:

Loan Amount:               $ 200,000
Interest Rate:                 4 %
Offset Balance:              $ 30,000
Offset Interest Rate:      2 %

Interest Saving $ 600 (assuming the $30k remains in the offset account for a full year)

100% OFFSET ACCOUNTS however are a little different and are often a far more popular option. These accounts earn interest equal to your home loan interest rate.

Using the same example as above except this time with a 100 % Offset Interest Rate of 4 %, the Interest Saving is $ 1,200 (assuming $ 30k remains in the offset account for a full year)

WHAT IS A REDRAW FACILITY?

A redraw facility allows you to deposit extra money (above your regular repayments) directly into your home loan account. You can then redraw those extra funds if and when you want to. In respect to saving interest, a redraw facility has a very similar effect to a 100 % offset account.

If you consider the example used earlier, it means that with a redraw you would be paying 4 % interest on $ 170,000 instead of on $ 200,000 (because of $ 30,000 in redraw)

OFFSET vs REDRAW

So if redraw facilities and 100 % offset accounts have very similar savings, which one is best for your needs?

As offset accounts operate in a similar fashion to a savings account your funds are usually easily accessible. Some offsets even come with credit cards, EFTPOS and cheques for ease of use. Depending on the Lender it may not be as easy to access your funds with a redraw account as some lenders will limit the redraws you can have per year, may have a minimum redraw amount and may charge you a redraw fee. However some people may prefer a redraw facility as the excess funds are not necessarily as easy to access.

What is important is to find out exactly how a Lender’s offset account or redraw facility operates before you choose a Lender or one of these facilities because they are definitely not all the same.

Talk to your trusted professional and make sure you have all the facts before making a decision!

The information in this article does not necessarily represent the opinions of our Company nor the writer. The article is provided for information purposes only and is not intended to constitute legal, financial or other professional advice and has not been provided with regard to the investment advice or objectives or circumstances of any particular reader. While based on information believed to be reliable no guarantee is given that the information is accurate or complete.

Fixed vs Variable

Fixed vs Variable

Whilst there is no way to predict what will happen to the economy and interest rates in the future, what is helpful to understand is the advantages and disadvantages of fixed and variable home loans so you can determine which one may suit you.

Advantages

One of the main advantages of a fixed rate home loan is certainty, as it ensures your repayments will not change for a set period of time. This can help you to plan ahead.

Secondly when interest rates are low you can take advantage of fixing at a low rate and retain that rate even if interest rates rise. This in turn could possibly lower the total amount of interest paid over the loan term.

Disadvantages

If you have fixed your home loan and interest rates go down one disadvantage is you will not benefit from the decreases in interest rates.

If you are on a fixed rate and want to switch to a variable rate or want to refinance or sell your property, a disadvantages is you will have to pay a break cost which can be quite high depending on how long you have had the fixed term for.

Another disadvantage is that with a fixed rate there is often restrictions on making additional repayments.

Best of both worlds

You could also consider fixing part of your mortgage so you get the security of a fixed rate home loan and the flexibility of a variable rate at the same time.

Most importantly you need to weigh up your individual circumstances and goals before making any decisions on how to structure your loan.

This is general information only and is subject to change at any time. Your complete financial situation will need to be assessed before acceptance of any proposal or product.

The Mortgage Process

The Mortgage Process

Interview

During your initial meeting with a Mortgage Professional they will listen to your requirements and will explain the features and benefits of loans that may work with your situation. They will discuss and provide you with numerous options available to suit your needs. Once you are happy with your selection of the loan product, the loan process will commence.

Loan Application

Your Mortgage Professional will work with you through a number of documents including a Needs Analysis Credit Quote & Proposal and the lenders application. They will also explain what is required in relation to the necessary supporting documentation required so your home loan application can be lodged.

Lender Assessing Application

The Lender will assess your application to determine whether you meet their credit requirements. This process includes confirmation of your income, employment and a credit reference check. Your supporting documentation is also assessed at this time. If the credit assessor requires any additional information they will send through a request to the Mortgage Professional.
Timeframe: Depending on the Lender – between 24 hours and 14 days.

Conditional Approval

Your Mortgage Professional will receive a communication on your behalf, from the Lender in the form of a conditional approval. Within the approval, the Lender will outline any matters that need to be addressed before they can issue an unconditional approval. Your Mortgage Professional will advise you when they receive this approval.

Valuation

The most common condition of an approval is valuation of the security being provided. The lender will order the valuation which could take up to 3-4 days to complete. The valuation is often included in an application fee if there is one applicable.

Formal Approval

When a home loan application is formally approved (also known as unconditionally approved) it means that all conditions and criteria required to assess the application have been supplied, assessed and approved. It is only when formally approved that the borrower can feel comfortable they can obtain a home loan. If you are buying a property it is advisable NOT to exchange contracts until your loan has been formally approved. Your Mortgage Professional will be notified of formal approval and will then notify you. A formal Letter of Offer will be issued by the Lender. Mortgage documents will be prepared and sent directly to the applicant/s or their solicitor, depending on what was requested.

Mortgage Documents

Documentation provided to you by the Lender includes the letter of offer; transfer document; terms and conditions of the loan and any other documents that are pertinent to the Lender’s own guidelines. If a purchase is involved then it is highly recommended that you go through the paperwork with your conveyancer and for the conveyancer to liaise with the Lender to schedule a settlement date. If the loan is just a refinance or a ‘top up’ it is recommended you sit down and go through these documents with your Mortgage Professional if you have opted not to use a conveyancer.

Settlement

After the mortgage documents are signed, witnessed and sent back to the lender, then settlement is arranged via your solicitor/conveyancer or if there is not a necessity for a conveyancer then the Mortgage Professional will be involved to ensure settlement is completed.

This is general information only and is subject to change at any time. Your complete financial situation will need to be assessed before acceptance of any proposal or product.