You might not be aware that a number of handy features are now available with your home loan to help you manage it more effectively – the most common being mortgage offset accounts and redraw facilities.
Both features can make a significant impact as part of a mortgage reduction strategy, taking years off your mortgage and helping to save in interest repayments.
The basis for each technique is simple: by making extra repayments to your principal loan amount you will reduce the interest you are charged – thereby reducing the life of your loan.
While both offset accounts and redraw facilities can be an effective mortgage reduction tool for many borrowers, you may find that you are paying a higher rate on your loan for bells and whistles you don’t really need.
When discussing these options with your broker, here are some important points you’ll need to consider:
Redraw facility: Lets you make extra repayments directly into your loan, helping to drive the principal down faster. This reduces the interest you’re charged each month, allowing you to channel more money into cutting the principal loan amount further. Unlike a basic home loan, you can redraw additional repayments if required – to cover school fees for example – without having to refinance your loan. While this offers a degree of flexibility, a redraw is ultimately more expensive: you can often incur fees for each withdrawal and may find that the amount or frequency for withdrawals has a cap. Additionally, you will need to exercise restraint from redrawing amounts too frequently as you may actually extend the life of your loan.
Mortgage offset: This feature effectively allows you to save on the interest you are charged on your mortgage through offsetting its balance against your savings. For example, rather than earning a few per cent interest in a traditional savings account, through placing your savings into your mortgage offset you could save between nine and ten percent interest – the average standard variable interest rate charged on a home loan. You can also direct your salary into the account while servicing your bills and other debts as required. Mortgages that have an offset account attached to it usually charge a higher rate of interest, and often require a substantial amount of cash to remain untouched in the account to reap maximum benefits.
There are obviously pros and cons with both options; make sure you talk through your objectives with your broker before making a decision on adding a redraw or offset facility to your mortgage.
Clinton Waters
More Rosh & Waters Finance
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