Know the why's of refinancing your loans and reap the benefits.
When the Reserve Bank of Australia (RBA) announces a rate drop, it’s your cue to check your mortgage details and go shopping for a better home loan deal.
We already broke down the dollar signs in our article “Why now is a good time to refinance or renegotiate your home loan”, spoiler alert: lower interest rates = serious savings. But the plot thickens, because it’s not just about scoring the best rate, refinancing also opens the door to other money-saving perks.
A recent refinancing report by PEXA revealed that beyond price-related features (interest rates and fees), refinancers also highly favoured loan products that had offset accounts and redraw facilities. Why? Because these features can quietly save you thousands of dollars.
💸 Offset Accounts
Imagine your savings account and your home loan had a baby - that’s basically an offset account. It works like a normal savings account, but the money in it reduces the portion of your loan that gets charged interest… meaning you pay less interest over time.
Over the past five years, Westpac recorded a 37% increase in offset accounts opened, and a 63% increase in offset account balances. (Clearly, people are onto something)
So how are Aussies using them?
Let’s say you’ve got a $500,000 loan but keep $10,000 in your offset account. The bank doesn’t charge you interest on the full $500k. Instead, it treats it like you only owe $490k, because it “offsets” the $10k.
So what does that actually mean? You end up paying less interest each month and more of your repayment goes towards reducing the loan itself (ie the principal amount), which means you pay off your mortgage faster!
If you kept the $10k in your offset and deposited an extra $100 every month, you could save ~$103,000 in interest over a 30 year loan (assuming an average Australian home loan interest of 6.24% p.a.), and shave nearly 3 years off your mortgage - winning!
💸 Redraw facilities
Redraw facilities act similar to an offset account, but different. Redraw facilities let you pull out any extra payments you’ve made on top of your minimum loan repayments. So, if you’ve been low-key overachieving by repaying an extra $500 every month, then after a year, you’ve got up to $6,000 ready to redraw if needed.
The hope is that you don’t need to redraw on this money but life happens, cars break down, fridges die, surprise weddings pop up...That’s where redraw facilities can be super helpful
But if you don’t need that cashola, it’ll continue to save you interest as long as it’s in your home loan account.
The key thing to know: not all redraw facilities are created equal. Each lender has their own rules, fees, and limits, so always read the fine print before you start mentally spending that redraw stash.
The difference between offset accounts and redraw facilities?
Unlike an offset account which is a separate bank account linked to your home loan, the redraw facility is part of your actual home loan. You can’t access it like a normal bank account, and there might be limits or delays on how much you can withdraw.
A redraw facility will actually reduce the total balance of your home loan, as opposed to just reducing how much interest you have to pay for an offset. It’s suitable if you want to actually pay off your home loan early.
A cash rate cut is your potential mortgage makeover moment. So take a look at your home loan, see what’s out there, and think beyond just interest rates. Features like offset accounts and redraw facilities aren’t just shiny extras, they’re smart tools that can put money back in your pocket and give you more control over your financial future.
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