Loans that cut interest and can help pay bills
IT is not always the interest rate that matters when selecting a home loan, sometimes it is the extra features and benefits that make a difference.
I often find myself explaining to clients the difference between offset and redraw, and how to make the most of them.
One hundred per cent offset is a transactional account, much like your everyday savings account, it just has the added benefit of reducing the amount of interest that is charged on your home loan.
For example, you have $10,000 in your offset account, and $250,000 owing on your home loan, the interest will be calculated on the $240,000, a nice little saving.
As offset is a transactional account you can use this account for your daily expenses so every dollar you have in your bank account is saving you interest charges.
Redraw, on the other hand, is where you have made extra payments into your home loan account and because of the extra money paid you are able to redraw this money.
The extra money paid into your home loan again reduces your monthly interest cost on your loan account the same as an offset.
However, you will find that redraw is generally limited to being done online, without the same transactional account functionality offered by offset.
It is also worth noting that some lenders have a minimum redraw amount, or a maximum number of allowed redraws in a month.
Depending on a client’s need needs and specific suitability for a home loan, if a lender offers offset and redraw then I recommend a money management process to make the most of these accounts.
Make extra specific repayments into your loan account and build up your funds available as redraw.
This money is your safety net, it’s not to be used for anything but to keep you financially afloat if bad times hit or for specific long-term expenses, such as school fees.
The money you put into your offset account is for lifestyle goals, like saving for a big family holiday, Christmas, and unexpected expenses, like medical and vet bills. — Michelle Heagney is an Authorised Credit representative No.480251 of Geelong Loans Pty Ltd Corporate Credit Representative No.480798 of Southern Cross Broker Network Pty Ltd Australian Credit Licence No.384993