A mortgage offset or redraw facility can be an effective mortgage reduction strategy, however to maximise the benefits you’ll need to be diligent.
Both features, which are linked to your mortgage, essentially work by minimising the overall loan amount you’re charged interest on, but they have subtle differences.
A mortgage offset account is a separate savings account that sits alongside your mortgage – with any funds placed in this account used to offset the balance of your mortgage.
So, for example, on a $100,000 loan with $20,000 in the offset account, you’ll only pay interest on $80,000 as long as the offset account balance remains the same.
While you typically won’t accrue any interest on the funds held in the offset account, you will save on the amount of interest paid on your home loan.
With interest on a typical standard variable rate loan at around 6.5 to 7 per cent, you’ll be saving a reasonable sum each month rather than attracting the 1 to 3 per cent of interest that’s paid on the average transactional savings account.
A mortgage redraw facility works in much the same way however rather than placing extra savings in a separate account, your funds are channelled directly into your loan – driving down the principal loan amount.
You can withdraw any additional payments made to your loan; however there may be a charge for the privilege, so check the small print.
One popular strategy with borrowers to maximise the effectiveness of a redraw facility is to channel their monthly salary directly into their mortgage.
A point worth noting is that lenders calculate interest on a daily basis. Therefore, every dollar that’s knocked off your balance every day will save you interest.
With your monthly salary driving down your loan over the course of the month, you can opt to meet monthly expenses with a credit card that has an interest free period, repaying the balance from your loan on the final day of the month.
As long as you’ve spent less than you’ve earned each month, you’ll be ahead with your mortgage.
While at first glance this might seem a complex mortgage reduction strategy, the savings can be considerable as long as you’re disciplined.
But be warned – without due care credit card spending can easily spiral, so there’s a danger that you’ll end up exceeding your monthly salary. And this could end up costing you far more in the long run.
So when it comes to deciding whether to opt for an offset account or managing a redraw facility, ¬you really need to assess how disciplined you are when it comes to your finances. It’s also important to remember that you may well be charged a higher interest rate for the privilege of fancy loan features, so make them work.