When it comes to managing your mortgage, there are some home loan features that have a significant impact. From reducing interest charges to accessing extra repayments, offset accounts and redraw facilities are two home loan features that can save you money and provide greater flexibility. Understanding how each of these works – as well as their benefits and drawbacks – can help you make an informed decision about which home loan features are right for you.

Maximising savings and reducing interest with offset accounts

An offset account is a separate savings or transaction account that is linked to your home loan account. The balance in this account is used to offset the outstanding balance of your mortgage and interest is charged on the difference.

For example, if your mortgage balance is $300,000, and you have $50,000 in your offset account, you'll only pay interest on the offset balance of $250,000.

Pros:

• Interest savings: The most significant advantage of an offset account is that it can save you thousands of dollars in interest over the life of your loan, as your savings effectively reduce the principal amount on which interest is calculated.
• Flexibility: You can access the funds in your offset account whenever you need them, which can be especially helpful in an emergency or when you need to pay large expenses.

Cons:

• Higher interest rates and fees: Lenders may charge additional fees for maintaining an offset account, while your home loan account on a floating interest rate could attract higher interest charges if interest rates go up.

Accessing extra repayments with redraw facilities

A redraw facility allows you to make extra repayments into your home loan account, and then, if needed, withdraw those extra payments later on. Also known as a revolving credit account, a redraw facility is essentially a large overdraft account that you can draw from, offset against your mortgage balance.

If you've been diligently making extra contributions to your mortgage over the years, you could tap into these funds via the redraw facility to use for various purposes, such as home renovations or an unexpected emergency. What’s more, the extra contributions you’ve made are offset against your mortgage balance, so you only get charged interest on the balance.

Pros:

• Interest savings: Just like offset accounts, making extra repayments through a redraw facility reduces your mortgage balance and can result in significant interest savings.
• Principal reduction: Reducing the principal balance of your loan means you'll pay off your mortgage faster and own your home sooner.
• No additional fees: Redraw facilities typically do not come with extra fees, making them a cost-effective option for managing a home loan.

Cons:

• Fees and restrictions: Unlike offset accounts, accessing the extra payments in a redraw facility may be subject to restrictions, such as minimum redraw amounts or limits on how many redraws you can do in a year. If you do use a redraw facility, be aware that money you put into this account shouldn’t be money that you’ll need to use a few weeks later.
• Lost investment opportunities: Money held in your redraw facility may not be earning as much interest as it would in a separate savings or investment account.

Which home loan feature is right for you?

Choosing between an offset account and a redraw facility will ultimately depend on your financial situation, goals, and preferences. Here are some things to consider:

• If you want to maximise your interest savings and maintain flexibility, an offset account might be the better choice.
• If you're comfortable with making extra repayments and want to reduce your loan term quickly while having access to those funds when needed, a redraw facility could suit you.

Your lender's terms and conditions for these home loan features, as well as any associated fees, should also be considered.

Of course, choosing home loan features is only one aspect of managing a mortgage effectively. Any decision you make should also align with your current and future financial goals. And that's where a mortgage adviser can help.

At Mortgage Express, our team of experienced mortgage advisers work closely with our clients to tailor personalised mortgage solutions. Contact a Mortgage Express branded mortgage adviser today for assistance in finding the most appropriate home loan features and structuring your mortgage to reach your home ownership goals.