What is the difference between an offset account, a line of credit and a redraw facility?
AND… CAN THEY SAVE ME MONEY?
At property loan advisor we deal with a lot of enquiry when speaking and advising clients on what type of mortgage is suitable for them. The options appear to be endless and can be confusing. The key is to have a loan product that will help save you money, offer flexibility and help you achieve your goals.
THE OFFSET ACCOUNT
The simplest way to describe an offset account is a normal everyday transaction or savings account that is linked to your home loan. That means when the mortgage lender calculates the interest to your loan, they take the balance in your offset account off what you owe on your mortgage and apply interest on the reduced amount. So at the end of the month when interest is added, a lower amount of interest is added to the loan. These savings could be quite significant just for letting your accumulated funds and wages sit in your account.
The bank or lender may charge transaction fees, but most lenders will waive transaction charges on offset accounts altogether, they are more likely to charge a “package fee” for the loan, offset account and a credit card. Many clients like to have all of their salary paid directly into the offset account. This ensures that any income not spent is being used to reduce the balance of your loan. While receiving the interest savings you also have the flexibility to access your funds at any time.
The below example is based on one of our clients – they have $50,000 in their account and it offsets $50,000 on their loan account, having the effect of interest only being charged on $300,000 instead of $350,000. As you can see the savings are quite substantial and the clients have the ability to access the funds at any time they need to.
Albert Einstein said that compound interest is the eighth wonder of the world I am going to suggest that Mortgage Offset Accounts are the ninth wonder of the world! These accounts have so much flexibility and can save you lots of money!
THE LINE OF CREDIT
The simplest way to describe a line of credit is that it is like a giant credit card limit, secured by your home. This product has loads of flexibility, although … along with flexibility comes responsibility. Many of our property investor clients love the line of credit product as it is part of their overall strategy for growing a property portfolio.
For example, our client may own a home that is worth $500,000 and currently have a home loan of $300,000. Their goal is to buy an investment property. We can approach a lender to set up an additional $100,000 as a completely separate loan to the existing home loan of $300,000. The advantage of doing it this way is that you have loans set up with different purposes. The existing home loan can remain on a principal and interest loan and the second loan of $100,000 can be a line of credit loan and can be interest only. The line of credit can then be access for the deposit and cost for the purchase of an investment property. The other major advantage of having the loans split into this structure is that you keep your non deductable loans separate from your deductable loans. Check with your accountant if you are entitled to claim the interest on your line of credit.
Many people approach their existing lender with the goal of purchasing an investment property and they are offered an increase on their existing home loan and then they can access the cash through a redraw facility which I will discuss next. The problem with this loan structure is that your borrowings are not separate and when it comes time to tax time you may have destroyed a very nice tax deduction.
A home loan with a redraw facility allows you to borrow money you’ve already repaid and is usually offered with variable interest rate loans. It allows you to use any extra income or savings to reduce the balance of your loan, thereby reducing your interest repayments and “redraw” that extra money in the future should you need it.
Some lenders will limit you to as few as two redraws per year. Others will charge you up to $50 per withdrawal, and some even insist that you redraw a minimum of $2000. Check with your bank or mortgage broker for a redraw facility that provides you with maximum flexibility at minimum cost.
All three options will you to save money, getting the right advice on each facility will not only give you savings on your home loan but will allow you easy access to cash to help you with your goals.
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