You’ve made the big step and purchased your new home. Congratulations! You now have a mortgage with regular minimum payments to meet. Now that you’re a home owner with a mortgage, you may hear phrases like ‘offset accounts’, ‘redraw facilities’ or even ‘top ups’. But you may not know what they mean, or whether or not they can work for you.
So, let’s look into what each of them are, and when they may be best for you.
Offset or Redraw?
An offset account and redraw facility could help you to pay down your home loan more quickly and reduce your interest costs. When choosing between the two, it’s vital to consider your own individual circumstances as they both offer slightly different approaches to mortgage repayments.
What is an Offset Account?
An offset account is a stand-alone savings account that is linked to your home loan, with the same lender. You can make regular or one-off deposits to your offset account and withdraw from it as needed. In this sense, it operates like a normal transactional savings account. It even comes with a debit card, enabling you to withdraw cash from an ATM, the same as your savings account.
The primary difference between a traditional account and an offset account is that the money in an offset account does not earn its own interest. Instead, it offsets the balance in that account, against your mortgage balance.
In other words, at the end of each day the account balance is subtracted from your home loan balance before interest is calculated. This reduces the amount of interest you pay on your mortgage because the interest charged on your home loan is calculated on your loan balance minus the funds held in your offset account.
What is a Redraw Facility?
A redraw facility is not a separate account from your home loan. Instead, it is a feature of a variable rate mortgage that enables you to make additional repayments into your home loan, above the minimum payment amount. This reduces the balance owing on your home loan, which means you will pay less interest and can pay your loan off more quickly.
A redraw facility also enables you to withdraw from those additional repayments at any time, should you need to. However, you must have been making additional repayments beforehand. If you do make a withdrawal, the balance of your home loan will also increase by the amount withdrawn and your interest costs will go up too.
What is a Top-Up?
A top-up is when you borrow against the home equity you have built up in your home through mortgage payments. You can think of it simply as a home loan increase. It’s called a ‘top up’ because instead of taking out another loan you are simply increasing, or ‘topping up’ your current loan to access more funds. Of course, your ability to do this depends on the equity you have within your home.
Equity in your home is the difference between the value of your home and the remaining balance on your home loan. You gain equity as you make mortgage repayments (and lower your loan balance), and as the value of your home increases - it’s this slice of the pie that is available when you want to top up.
There are many reasons why you might want to top up your home loan. Perhaps you have a ‘big purchase’ goal like renovating your home, buying a car or paying for school fees. Perhaps you just want to consolidate other loans into one regular repayment. Regardless of the purpose, borrowing money (or topping-up) against your home loan is attractive, because home loan interest rates are generally lower than rates for credit cards, personal loans and car loans.
What’s Right For You?
Understanding the practical differences between offset accounts, redraw facilities and topping-up your home loan, can help you to make the best decision for your circumstances.
It’s a good idea to talk to a banking representative to find the different opportunities available to help you pay down your loans quickly and how you might be able to take advantage of any equity benefits you might be earning.
If you’d like advice about what options might be best for you, pop in to your local BOQ branch and chat with one of our lending experts today. They’re always happy to help!