Redraw or Offset? Which one is better for a first home buyer?

Any general questions you might have in regards to loans and finance.
Clarice
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Joined: Mon Sep 09, 2019 12:24 pm

Redraw or Offset? Which one is better for a first home buyer?

Postby Clarice » Mon Sep 09, 2019 12:26 pm

Hi, a first home buyer looking to buy my first house in the spring. While online looking up information on home loans, most loans are advertising redraw and offset facilities. From what I understand they both work to reduce your interest. So, what’s the difference?
Which one is better/cheaper for a first home buyer?

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Otto Dargan
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Re: Redraw or Offset? Which one is better for a first home buyer?

Postby Otto Dargan » Mon Sep 09, 2019 2:02 pm

Hello Clarice. Welcome to the forums.

‘Redraw vs offset’ is a common question we get so let’s break it down.

Redraw is a facility which allows you to take out any extra repayments you’ve put into your home loan. The extra repayments work towards reducing the interest by reducing your home loan balance. You’ll have to activate the redraw feature on your home loan by submitting your lender’s ‘Redraw Authority Form’.

While an offset account allows you to use your everyday funds to reduce the balance of your home loan; so, you’re only paying interest on the balance. This is money that’s easily accessible. However, even though you’re paying interest on only the balance, your home loan balance doesn’t change. This is more like your day to day bank account working for you.

There are two key differences:
  • First, lenders have limits on the amount you can withdraw using a redraw facility, while, with an offset account, you have full control over your funds with no limits. And with some fixed-rate loans redraw facility is not available.
  • There are tax benefits to using an offset for an investment loan instead of a redraw. For example, if you have a mortgage of $600,000 and have put in extra repayments and reduced your loan balance to $100,000. You then decide to buy an investment property and rent out your old house. You redraw $200,000 to buy the investment property. Your new loan would be $300,000 but the deductible investment loan interest, in this case, would be limited to the interest on the previous $100,000 balance. However, if you’ve put in the same amount into the offset. You’re paying less in interest as you’re only paying interest on the balance. However, if you withdraw the same $200,000 but in this case, the deductible loan interest will be based on the net debt of $300,000.

Offset gives you a better tax outcome taking into account your future investment plans. Although, many lenders charge a small fee for offset facilities. Finally, an offset account may only be suitable for financially savvy people. If you’re bad with money, redraw may be better suited.

Our award-winning specialist mortgage brokers can help you find the right option for your needs after a full assessment.

Give us a call on 1300 889 743 or fill in our free assessment form to find out.
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

Clarice
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Joined: Mon Sep 09, 2019 12:24 pm

Re: Redraw or Offset? Which one is better for a first home buyer?

Postby Clarice » Mon Sep 09, 2019 3:46 pm

Which one would you suggest for me? And can I get a home loan with no redraw fees?

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Otto Dargan
Mortgage Specialist
Posts: 7728
Joined: Sat Sep 06, 2008 5:55 pm
Location: Sydney, Australia
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Re: Redraw or Offset? Which one is better for a first home buyer?

Postby Otto Dargan » Mon Sep 09, 2019 6:16 pm

Hi Clarice,

If you’ve no plans to buy an investment property anytime in the near future and don’t want the temptation of easy access to your funds, redraw may be a better way to go.

Yes, there are a few lenders on our panel who offer home loans with no redraw fees and competitiveinterest rates.

Cheers,
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

Clarice
Posts: 3
Joined: Mon Sep 09, 2019 12:24 pm

Re: Redraw or Offset? Which one is better for a first home buyer?

Postby Clarice » Mon Sep 09, 2019 7:14 pm

Cool. So, looking at the current interest rate environment, what would be a better choice between a fixed or a variable rate home loan?

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Otto Dargan
Mortgage Specialist
Posts: 7728
Joined: Sat Sep 06, 2008 5:55 pm
Location: Sydney, Australia
Contact:

Re: Redraw or Offset? Which one is better for a first home buyer?

Postby Otto Dargan » Mon Sep 09, 2019 7:30 pm

Hi Clarice,

No one can say for certain if the interest rates will go up or down. However, leading industry analysts have predicted that further rate cuts may be on the cards.

Having said that, when choosing between a fixed rate home loan vs a variable rate home loan, your personal financial goals and plans will determine which is a better fit.

A fixed-rate home loan gives you the security of a fixed repayment but you’ll lose a lot of flexibility as you’ll incur penalties for extra repayments or high exit fees when refinancing. Not to mention if the rates drop, you’ll still be paying the fixed rate.

Don’t fix your loan if:
  • You want the option to make large extra repayments on your loan.
  • You plan to sell the property in the near future.
  • You plan to refinance within the fixed term.
  • You plan to renovate or build a new home and plan to use the equity within the fixed period.
  • You don’t want to be locked in with a particular lender or product.
There are a few lenders who have a fully flexible fixed-rate home loan as well as an option to split your loans between a fixed and a variable rate home loan. This way you can have the security of a fixed loan while also maintaining some flexibility.

Give us a call on 1300 889 743 or fill in our free assessment form to find out which one’s a better fit for your needs.
Cheers,
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts


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