Should I refinance for more financial flexibility?
When you're first getting on to the property ladder, it's a good idea to get a basic mortgage for your first home loan. Why? Because you can concentrate on making repayments without distractions or being charged additional fees for other complex features.
Basic vs Fully Featured Home Loans for Financial Flexibility
The simplicity of a basic home loan can help you establish equity quickly - once your money is paid in, you normally don't have access to your additional funds. But that can be the exact reason to make a change as you get used to living with a mortgage and would like access to more features to make the most of your money.
A fully featured loan can provide your household with greater financial flexibility. You can take advantage of features including an offset account, split loans (with part variable and part fixed interest rates) and redraw facility which, if used carefully, can help you pay off your loan faster.
Both offset account and redraw facilities allow you to put any extra income or savings to work reducing the balance of your loan, and reducing your interest repayments. There are similarities between the two facilities, but they work slightly differently to each other.
What is an Offset Account?
A Mortgage Offset account allows any savings in your transaction account to be counted against the home loan when interest is calculated. Offset accounts are offered by most lenders which offer normal transaction type accounts.
Most lenders offer 100 per cent offset accounts, where any credit balance in the account is used to offset the outstanding balance of the loan. The mortgage offset account itself does not earn any interest. The benefit is in the reduced interest charged on the loan, calculated by adding the funds from the offset account into the equation.
For example, if a borrower had a loan with a balance of $100,000, and an offset account with a balance of $10,000, then interest is calculated on the net balance of $90,000.
Many home loan products come with the ability to use ATMs and EFTPOS to access your funds, and some have a credit card linked with an interest-free period for you to use to pay your bills, leaving your funds untouched in your account earning interest.
Building up a healthy offset account balance rather than paying off the mortgage more quickly also gives greater flexibility in dealing with the lending institution. If you run into financial trouble and can’t meet a mortgage repayment from your salary, then money in the offset account can be used without you having to have a difficult conversation with your bank.
Pro Mortgage Tip: Arrange to have your salary paid directly into the offset account so that any unspent income works to reduce the interest you are charged.
And what is a Redraw Facility?
A redraw facility enables you to deposit any spare income you have directly into your home loan account. If you need to, you can then redraw from the loan any funds that are in excess of your regular repayments.
Some lenders will limit the number of redraws you can do in a year, or charge a fee to redraw your money (up to $50 per withdrawal), and some even set a minimum limit of what you have to redraw ($2,000 in some cases). The redraw facility is normally available on a variable interest rate loan. If you fix your interest rate, then you often have no access to the redraw funds until your rate fix period expires.
Showdown: 100 per cent Offset Account vs Redraw Facility for Financial Flexibility
A 100 per cent offset account wins for financial flexibility because it comes with fewer restrictions and is a great option if you want to use the account for day-to-day transactions.
If you must have a redraw facility, then check the conditions carefully and look for maximum flexibility at minimum cost.
Word of warning: Redraw facilities almost always work in the lender's favour, keeping you in debt longer, so think carefully before accessing your excess funds; how long did it take to earn the money in the first place, before you use it on a holiday or to upgrade your car.
However, both features, if used prudently, encourage you to put more money against your loan, reducing interest due in the case of an offset account, or allowing you to redraw excess funds to cover an emergency bill or fund a large cost you hadn't foreseen. Many loans come with both facilities, so check with your broker.
If you'd like help with assessing your personal and financial situation, as well as comparing the loans in the market to see if you're truly getting the right deal for you, then call Bob Malpass now on 0431 862 136, email [email protected] or send us a message via our website for a quick response.
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