Redraw VS Offset – What’s the difference?
Many people with a mortgage will have a Redraw facility as part of their loan and use this as a savings account. The trouble with this approach is that every time you tap into your ‘savings’, your mortgage goes back up again.
A much better solution is to use an offset account. Interest on your mortgage is calculated daily. Any money that sits in an attached offset account effectively reduces the amount of interest you pay on any given day. The longer the money sits in the offset account, the better.
If you consider a mortgage balance of $400,000 with interest at 3% p.a., the yearly interest bill would be $12,000. Now consider that you have an offset account attached to your mortgage and in that account you can maintain an amount of $50,000 for the same year. Effectively, the interest is now calculated on $350,000 not $400,000. Hence your interest bill is now reduced to $10,500 — a saving of $1,500.
For those of you who are ‘old school’ and like to use a traditional savings account, consider this. Most banks will barely pay you 1% in today’s low-interest world. When you consider Australian inflation rates are rarely under 1% (the average over the past 10 years is 1.9%), your cash savings is most likely losing value. So that same $50,000 that could save you $1,500 off your mortgage is only gaining you $500. So essentially, you’re $1,000 worse off compared with using an offset account.
If you are unsure if an offset account is available to you, contact your bank and ask the question. If it’s not, drop us a line and we will put you in touch with one of our finance specialists.