With interest rates on the rise, borrowers consider looking at offset or re-draw accounts as a better way to use residual income.
Coast-based mortgage broker Brenden Brial of SMS Finance explained that both types of mortgage-associated accounts as a rule apply to variable interest rate loans. “The lenders we use will offset or redraw, or some of them will have both.”
To explain how an offset account works; a borrower who has a $100,000 variable interest rate loan and an offset account set up against that loan which has $20,000 in it, the lender will look at both accounts and calculate the daily interest on $80,000. The interest is then charged to the loan each month. There is no interest earned on an offset account. Rather, the borrower earns a saving on the interest charged to the home loan.
“If you make weekly repayments that’s better than fortnightly and fortnightly is better than monthly,” Mr Brial says.
“Anything you can do to reduce your daily interest is better in the long run,” he adds.
In the case of a $1000,000 loan’s redraw account which holds $20,000, the funds can be paid into the mortgage account to reduce the loan, but the borrower can then redraw the funds and use them whenever required. “You still have access to that $20,000 but while it is sitting off the loan itself, it is saving you interest each day,” Mr Brial says.
Whichever a borrower chooses, these two options will save them money and that’s not a bad thing in this uncertain financial market. And the upside is the borrower always has access to the funds.
“If you have a variable interest rate loan, you should be utilising redraw or offset wherever you can,” Mr Brial says.
It’s not uncommon for borrowers to have several offset accounts to help them with budgeting. “I know of people who have got an account called ‘the fire extinguisher’,” Mr Brial says.
“If you are budgeting and have accounts for savings, bills, and a holiday, and you are allowed to have more than one offset account, it’s the accumulation of the funds in those accounts everyday that saves you money against the loan.”
Mr Brial notes there are generally no risks associated with redraw and offset accounts, but borrowers need to be aware of any account fees, which is where a good mortgage broker can make all the difference.