Owning a home is a thrilling adventure, but navigating the landscape of home loans can sometimes feel like wandering through a maze. So we’ve consulted the experts to unravel the secrets, and we’re here to make the journey as easy as pie. Today, let’s delve deeper into the essentials – the intriguing world of Offset vs. Redraw.
Redraws: Unleashing the Power of Extra Payments
Imagine this: you’ve been making extra payments on your mortgage, stashing away some cash for future travel or purchases. By making extra payments on your mortgage, you essentially build a reserve of funds that you can later redraw for personal use, whilst minimising the amount of interest you pay.
The beauty of redraws is the ability to tap into those additional payments when you need some financial flexibility. Dreaming of that shiny new car? No problem! With redraw, you’re essentially reborrowing those funds.
For example, let’s say you’ve paid $10,000 extra on your mortgage, and now you decide to redraw $5,000 for your dream car. However, there’s a catch. You forfeit the claim on interest for the $5,000 withdrawn, even if it originally came from the additional payments you made. In essence, it’s like taking a step back in the progress you’ve made on interest reduction for that specific amount.
Offset: Your Financial BFF
Now, let’s shift our focus to the financial BFF – the Offset account. It’s not just your average everyday account; it’s a powerhouse that can reduce the amount of interest you pay on your home loan.
With an offset account, you deposit your everyday funds – your salary, savings, and any other incoming cash – into this account. The magic happens when the balance in your offset account is subtracted from your outstanding loan balance. You then only pay interest on the remaining amount, effectively reducing the interest you owe.
Unlike redraws, which involve accessing extra payments made on your loan, an offset account operates continuously. Your offset funds remain untouched, always working in the background to minimise the interest you pay on your mortgage.
Essentially, both can work together to reduce the amount of interest you pay.
To truly master the mortgage game, understanding the nuances of offset vs. redraw is essential. It’s not just about making payments; it’s about strategically managing your funds to maximise the benefits.
If you require any assistance with your home loan, reach out to Michael Scaife today at michael@afmservices.com.au
For more information on offset accounts, visit our previous blog What is an offset account? (afmservices.com.au)
Or visit Home – AFM Finance Solutions (smartonline.com.au) for more information on how we can help you.
