Offset vs Redraw: What’s the Best Way to Access Your Money?

Over the the last few months, the COVID-19 pandemic has demonstrated just how important it is to have some money in the bank. Due to the lock-down and decrease in spending, many Aussies are experiencing job losses and lowered income, and as the weeks in isolation continue, even the most generous of government payments aren’t doing enough to cover the bills for all Australians. Savings accounts are being depleted.

According to research from the Gratten Institute, only 20 per cent of Australians have more than $50K in savings. A whopping 50 per cent of Australians having less than $7,000 in the bank. Unfortunately, this means that the average Australian isn’t prepared for a rainy day, and for many of them, that day has arrived.

Source: Gratten Institute

Given how well the housing market has performed in Australia, most Australians have a large portion of their wealth tied up in their home. They may have even put cash towards paying down their loans, however, that may complicate matters when they need to access cash. If you’re looking for a new loan, or want to access cash with your existing loan, it may help to understand the different loan features that you can take advantage of.

Redraw Facilities

Redraw facilities are the traditional method for accessing funds from your mortgage, and are included in many standard principal and interest loans. Redraw facilities may allow you to access extra money you’ve put into the loan, over and above the contracted principal and interest repayments. This means that if you’re ahead on your payments, you may be able to access that money. It works a little like a savings account. While this is good in theory, and certainly some Australians will have accessed this type of facility in recent months, the big issue is that the offer to redraw is still at the discretion of the lender. So theoretically, a lender can refuse a request to access these extra funds. So while a redraw facility can be handy, there might better options available to you.

Offset Account

These days there is a wide array of loan products that can significantly increase a borrower’s flexibility and reduce the amount of interest paid over the lifetime of the loan. For most borrowers, the best feature is often having a 100 per cent offset account. An offset account is a transaction account, that is linked to your loan. Money in the offset account reduces the overall loan balance which in effect, cuts down your interest payments. It’s a way of having your cake and eating it too. By parking some spare cash, or your savings in your offset account, you are going to be saving on interest. Organise your pay to go in to an offset account, and as interest is calculated daily, you will be saving on interest more often as well.

Refinancing

Depending on your personal circumstances, you could consider refinancing and accessing equity that has been built up in your home. You can then take advantage of your offset account by parking that equity in there and accessing it as you need it, while not paying interest on it. This money could be used in an emergency or even for something like the purchase of an investment property. Not all offset accounts are created equal, but that’s something you can talk to your mortgage broker about. What’s important is that you have control of your finances and you’re able to use that extra money or equity should you need it.