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Offset versus Redraw: Which Home Loan Feature is Best?

Getting money out

In New Zealand, redraw and offset facilities are fast becoming more popular home loan features for good reason. While mortgage interest rates are an important factor when it comes to choosing the right home loan, extra features – like a redraw or offset facility – play a big part too. These two home loan features allow you to use any extra funds you pay into your home loan while reducing the amount of interest you pay. And for diligent savers, that means significant savings. Here’s more about each of these features.

What is a redraw facility?

Also called a revolving credit account, a redraw facility is available on some floating rate home loans, allowing you to borrow and repay funds as you need them. It acts as a large overdraft account with a limit on the total amount you can withdraw. Any income or savings paid into the account are offset against your mortgage balance and you only pay interest on the balance of your loan. 

Benefits of a redraw facility include:

  • Flexibility to redraw extra repayments on your home loan when you need it most.
  • Earn interest on any savings while reducing your principal loan which means you’ll pay less interest too.

Downfalls of a redraw facility include:

  • Lenders may charge a fee for each redraw you make.
  • Some lenders restrict the amount or number of redraws you can make in a specified time.
  • Risky because it’s so easy – if you’re not disciplined, you could end up overspending your limit. 

This type of home loan feature works well for those with irregular income – like self-employed contractors or seasonal workers – and for those who are disciplined when it comes to spending and saving.

What is an offset account?

Similar to a redraw facility – in that any savings or repayments in your account are offset against your loan balance reducing the amount of interest you’re charged – an offset account is an everyday transaction or savings account linked to your home loan.

Benefits of an offset account include:

  • Any money paid into the offset account is accessible on a day to day basis, ideal for emergency situations when you need cash in a hurry.
  • Provided you leave enough funds in the offset account to cover your mortgage repayments, there is no limit on how much you can spend or save.
  • A tax benefit as you don’t pay any tax on your interest income from savings (as this account is not earning interest). 

Downfalls of an offset account:

  • While you can make extra repayments into your home loan account from your offset account, these funds are not available for redraw should you need them later.
  • Offset accounts typically attract higher service fees so can be more expensive to manage. 

Redraw vs. offset

While both redraw and offset facilities are quite similar in principle, the main difference is that with an offset account the money in your transaction or savings account is accessible to you at any time up to any amount.

If you’d like to find out more about a redraw or offset facility with your home loan, or you have questions about refinancing your home loan with a new lender or interest rate, contact a Mortgage Express branded mortgage adviser today. Mortgage Express branded mortgage advisers are located throughout New Zealand and can arrange a time and place in your area to meet at your convenience.

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