After ten consecutive months of pain because of interest rate hikes, many of us are paying hundreds and even thousands of dollars a month more in repayments than in April 2022. But there are ways to minimise some of the pain.

1. Set up a mortgage offset

Offsets are extremely popular, with rating agency RateCity advising that Aussies had $244.05 billion in the December quarter stashed in offset accounts – a new record high – up $5.28 billion from the previous quarter, and up $21.10 billion when compared to the same quarter, a year ago[i]. 

A mortgage offset account is a savings or transaction account linked to a mortgage. The balance in the account is offset against the outstanding balance on the mortgage, reducing the interest charged on the loan. This can help borrowers repay their mortgage faster and save on interest charges.

Bet that caught your interest. Here is how it works: Let’s assume you have a mortgage with an outstanding principal amount of $400,000 and an offset account with a balance of $50,000.

You would be charged interest on the entire $400,000 outstanding balance if you didn’t have an offset account. However, with the offset account, the $50,000 balance is offset against the $400,000 outstanding balance, meaning you’ll only be charged interest on the remaining $350,000 balance. Better still, this will shave time off your loan’s length and the interest amount. There’s also the added benefit of flexibility with unrestricted access to any money in the offset account.

Conversely, there can be additional fees if you choose an offset account and higher interest rates. You should talk to a finance specialist, such as Our Broker, before you move to use an offset account.

2. Choose a redraw facility

An alternative option might be using a “redraw facility” to shave time and interest off your mortgage.

A redraw facility is a home loan feature that allows borrowers to withdraw any extra payments they have made on their mortgage.

Essentially, it allows borrowers to deposit their savings into their mortgage thereby reducing the balance of the loan and reduce the monthly interest on their loan. 

Borrowers are then able to withdraw the extra funds for unexpected expenses or even a much-needed vacation from home loan repayments, over and above their minimum required repayments. Often, using the money for unforeseen costs from a redraw will be cheaper than slapping the expenses on a credit card or going through the red tape in applying for a personal loan. 

But there are some hoops to consider with redraws too. For example, some lenders might charge a fee for accessing the additional repayments or have some withdrawal restrictions – so be sure to talk to a specialist from Our Broker before opting for a redraw. Also, if you access the redraw, your home loan balance and interest charges go up again. 

So, what is the better option?

It’s hard to say – as both a redraw facility and offset account reduce the interest bill on your loan in much the same way. The main difference is that an offset account works like a bank account. You can transfer money, such as a monthly pay packet, into the offset and withdraw cash at any time – you can even have a card attached or use it for online shopping.  

On the other hand, while a redraw facility can be cheaper in fees and rates, it requires a bit more attention to make sure you have as much free cash in the loan as possible, so it requires management. A redraw facility may also not be appropriate if the loan is for investment purposes.  

You should talk to a finance specialist, such as Our Broker, before you move to work out which of these mortgage reduction strategies suits your situation.

To help decide between an offset account or a redraw facility, contact Our Broker today on 1800 913 677.

[i] https://www.ratecity.com.au/home-loans/mortgage-news/risky-debt-continues-rise-almost-1-4-new-mortgages-unsafe-levels-debt