Redraw vs Offset Account [Avoid the $60,000 Offset Home Loan Stitch up]
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- Äas pĆidĂĄn 15. 07. 2024
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In this video Iâm going to show you 6 reasons why offset accounts are a complete stitch-up for first time buyers.
In fact, following these steps saved one of my customers close to $60,000 and by watching until the end Iâll show you how you can too, so keep watching.
Links to the tools mentioned www.huntergalloway.com.au/tools/
00:00 Redraw vs Offset [Avoid the Offset Account Stitch up]
00:17 1. The Marshmallow Test
01:26 2. The Hidden Cost
02:58 3 - Redraw vs Offset
05:00 4 - When Redraw Is the best option
07:00 5 - When an Offset Account Works
09:45 6 - My Final Thoughts
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1. The Marshmallow Test
A simple test conducted at Stanford University in 1970 involving hundreds of children, each left alone in a room with a delectable delight.
Before they were left in solitude offered a choice: they could have one right away, or two if they just waited. Could they resist sweet temptation for 15 agonizing minutes, or surrender to instant gratification?
This is the first problem with an offset account, having 24/7 access to your offset account in the way of a debit credit card. Because if you use an offset account correctly, both income and expenses go into the same account.
So will you pass the marshmallow test? Answer yes or no to the following three questions;
âą Are a budgeter?
âą Do you prefer to save money over spending it?
âą Do you find it easy to sacrifice for future goals?
If you answered yes to all three questions, then an offset account still might be for you.
Stick around because Iâll show you how to calculate whether an offset is worth it.
2. The Hidden Cost
As a first home buyer you might be shocked to find that some banks will force you to take a credit card with their package home loan, itâs the type of loan which offers offset accounts.
On average banks make $1,900 in interest on every credit card in Australia and ultimately comes at a hidden cost in applying for an offset account.
The next hidden fee is your loyalty. With a home loan package bankâs typically charge a $395 annual package fee, this is why the banks give you credit cards, offset accounts, insurance and other products either free or at a substantial discount.
What theyâre trying to do is transition you to whatâs called an MFI customer (thatâs bank lingo for a main financial institution customer).
Think of MFI like Amazon Prime. Paying a fee creates a sunk cost and means youâll try to get your moneyâs worth. In the United States this translates to Prime Customers spending more than double their non-prime counterparts. It essentially allows Amazon to make more money as peopleâs propensity to shop around decreases drastically!
Back to the banks, they too implement this strategy and at a certain point youâll be so interwoven into their ecosystem that even the thought of leaving sends shivers down your spine.
The net results means you pay more and ultimately the banks profit BIG TIME.
So to know if youâll be hit with hidden costs answer these three questions;
âą Have you had a credit card in the past, and if so paid interest on the facility?
âą Are you still with the same bank you were with as a kid?
âą Do you value confidence over price?
If youâve answered yes to all three questions, then offset isnât for you.
3 - Redraw vs Offset (use the example)
So letâs quickly touch on what an offset account is then look at the alternative.
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I like the marshmallow test you gave. My husband and I answered yes to all... so offset would suit us. Weâve learnt our lessons from being young and silly with money so the temptation to touch âsavingsâ isnât really an issue for us (unless we had a big financial hardship)
Hi SoSheree, that's fantastic! đđđ
That's exactly right, the best lessons are learned by hard mistakes. Thanks for watching and sharing your story.
Thanks for another great video guys.
Our pleasure! Thanks for watching đ đ
This is great info. Thank you.
You are so welcome!
Awesome video đ
Thank you! Cheers!
This video is exceptionally good at explaining the pros and cons of Offset. TBH, I don't see any cons of the Redraw except that the extra repayments are 'less' accessible than the Offset.
Thanks for watching Ashish, appreciate the feedback!
Tax deductibility is a big issue for redraw as well
One thing you can't forget about a redraw con, is that banks will amortise your redraw to ensure you pay off the loan within the contracted loan term, so if you're using redraw as a savings account it may not be the best option. You can have 20k one month in your redraw and next month your redraw has decreased to 18k
but isn't more money you have in the redraw, the better for the interest payment in the long term?
Hi Matthew, I've not heard this before. So you're saying the bank will reduce your repayment as your redraw increases? Which bank is this? Very interesting... Generally your repayment remains the same, but the amount in interest decreases, which means over time you pay off your home loan much faster as paying more into the principle... Thank You for watching đ đ
Spot on! đ đ @[JOHNSON]ížìŁŒìĄŽìš
@@MortgageBrokerAustralia Sorry no, so i work for a big 4 bank. So lets say you have 20k in your redraw available to take out. You make your RMRA via direct debit. But cause you have money in your redraw and you've taken a loan from a bank, the bank will sink some of that redraw into the loan an unavailable for you to take out, and can leave you with 19k (or whatever the bank decides to sink into the loan) available to redraw
Good work Vecchio boys đđ»
Thank you đ
lol what? The major con to a redraw facility is if you want to rent out the property. For first home buyers, this is probable.. If you ever need to withdraw from your redraw, you'll only be able to claim the interest as a tax deduction on the remainder of the loan.
Example: Say you have a 300k loan and 100k extra cash. With the extra cash sitting in an offset, the interest is calculated on 200k. If you withdraw that 100k for a non-investment purpose (to buy a car for example), you can still claim interest on the whole 300k on your tax if youâre renting the house out.
Comparatively, if you take that 100k out of your redraw facility, youâll only ever be able to claim interest on the 200k, even if you add the 100k back at a later date. When you initially add to your redraw, you in theory have âpaid back part of the loanâ. You can withdraw back the 100k from redraw, but this is like requesting to the bank that âI again want more loanâ and the bank may refuse or allow you to access a lesser amount.
If it's a 'forever home
' and your goal is to simply pay off the loan, a redraw may be worth it. but for first home buyers who may rent the house out in the future, a redraw isn't good advice.
Hi John, thanks for your comment đ and great question!
If we are looking a probability - then based on stats in 2011, only 7.90% of Australians owned an investment property compared to 68% who owned a home. It means that 88%, or an overwhelming majority of the time, this advice holds true.
The main point of this video is not to say offset or redraw is better. Rather, to question what an offset account is, and the benefits associated. It is encouraging people to look at the numbers and to get advice from professionals (i.e. accountants) to really understand which will be more beneficial both short and long term. Too often do I see people fall into a trap of not questioning which will be best for them.
Looking at one lenders offering and youâll see how true this is - with their redraw home loan (2.34% - no fees) vs their offset (2.54% with a $250 annual fee). This means to take an offset account with this lender you would be slogged 0.20% or on a $500,000 home loan - $1,000 a year. This is a significant cost indeed.
Thanks for watching and being a subscriber :)
@@MortgageBrokerAustralia Interesting stats, and thanks for the reply! Redraw definitely sounds better if you don't intend to rent your house out while still paying the mortgage.
Have watched some of the other vids and they were good. Only lasted 12 seconds with this as I have a different stance. All stances are good, but I had done a lot of prior research. The annual fee has been far out weighed in my case
Thanks for sharing and appreciate your feedback
Outdated. Do you have an up to date video?
Offset is your money, the redraw is the banks very simple.
Thanks for watching Paul!
Is that $395 annual fee is an addition to the loan maintenance/service fee which is the same amount?
Thank You for watching đ đ - yes, it'll be one or the other. So some bank's will charge the annual fee, other's a monthly service fee.
Is a redraw the same as revolving credit facility ? Iâm so unsure which approach I should do when it comes to refix time. Iâve saved up extra money to dump on it as a lump sum and thought Iâd increase my repayments. Why not just increase repayments on a fixed lower interest loan instead of having the high interest revolving credit ? I assume itâs the flexibility
Hi Micah. To answer your question, a redraw and a revolving credit facility are not the same thing but they share some similarities. Both allow you to access additional funds if you've paid more than your regular repayment amount, but they operate differently.
In a redraw facility, you make additional payments on your loan over time, and then have the option to 'redraw' or withdraw these additional funds if needed. The advantage of this is that while your extra funds are in the loan, they're reducing your interest payable. However, access to these funds might be limited and there might be fees for each redraw.
A revolving credit facility, on the other hand, is a type of credit agreement where the lender provides a certain amount of always available credit for a set period (like a credit card) but secured against a property. The borrower can take, repay and re-borrow the funds within the agreed limit.
In terms of whether you should increase repayments on a fixed lower interest loan instead of having the high interest revolving credit, it often depends on your circumstances. Higher repayments on a lower interest rate loan can reduce the loan's term and save you a significant amount of interest over time.
However, a revolving credit facility provides flexibility as you can draw from it at any time up to the limit, which can be beneficial for unpredictable expenses. Its main disadvantage is typically a higher interest rate compared to a traditional fixed loan.
Remember that every person's financial situation is unique. What works for one person might not work for another. It's always advisable to consult with a mortgage broker (like ourselves: www.huntergalloway.com.au/contact/) to understand which financial products best meet your personal needs and circumstances. They can provide tailored advice considering factors such as your income, lifestyle, financial goals and risk tolerance.
@@MortgageBrokerAustralia thank you very much for the reply here. i'm struggling to understand the difference between the redraw and revolving credit. That sounds pretty much the same to me. The only comparisons I seem to find online are offset vs redraw or offset vs revolving so I thought they were the same. Is there higher fees or interest rates associated with one or the other usually?
I don't really have plans to re draw or reborrow money from the account - just want the ability to pay extra in lump sums on the loan between fixing periods if that makes sense.
Thanks again
Hi Micah. You're welcome! I understand your confusion as redraw facilities and revolving credit facilities can seem similar, especially because both allow you to access additional funds up to a certain limit on your home loan. Let's look at each of these facilities in a little more detail:
Redraw facility: A redraw facility is typically a feature of your home loan that allows you to make additional repayments, reducing the balance and therefore your interest charge. When you need extra funds, you can 'redraw' those additional payments you've made earlier. Not all loans have redraw facilities and some might charge a fee or limit the number of free redraws you can make in a year.
Revolving credit facility: A revolving credit facility (also known as a line of credit) is a separate product or facility that operates like a credit card with a large limit. This facility allows you to borrow funds up to a certain limit, repay the borrowed amount, and then borrow it again. Itâs like having an ongoing loan where you can draw, repay and redraw money as often as you like within your approved limit. Unlike the redraw facility, a revolving credit facility doesn't require you to make additional payments on your loan before you can access additional funds.
When choosing between these two, consider your own financial habits and discipline. With a revolving credit facility, you have greater flexibility to borrow funds up to the approved limit at any time. However, this can potentially lead to over-borrowing if not managed carefully.
As for interest rates and fees, it can vary greatly between different lenders and products. Generally, a revolving credit facility may have a higher interest rate compared to a typical home loan with a redraw facility because of the additional flexibility it offers. It's best to compare different products from different lenders to understand their fee structures and interest rates before making a decision.
If your main purpose is just to make extra lump sum repayments on the loan between fixing periods, a home loan with a redraw facility could be a suitable option for you. However, you should also consider the terms and conditions associated with the redraw facility, including any fees and restrictions on how and when you can redraw funds.
Remember, it's always a good idea to consult with a mortgage broker to help you make an informed decision based on your individual financial circumstances.
I don't know what an offset account is so this is confusing
Hey Johney check out our article here - www.huntergalloway.com.au/offset-account/ any other questions let me know.
I have a redraw mortgage and currently am paying my full time wage into it , and living off a part time 2second income this is lowing my principle dramatically . my question is should I be making extra repayments also or just continue to leave my repayments at current bank fig in my case around 500 per m and put all my savings into the mortgage redraw to accumulate
great informative videos , learning heaps
Thanks Kim, great question. It always pays to make extra repayments in the mortgage. So continuing to pay as much extra in the loan and redrawing out will help pay down the loan faster. Will be worth while checking out: www.huntergalloway.com.au/home-loan-extra-repayment-calculator/
I have offset account and I don't pay any annual fee
Thank You for watching đ đ nice one!
What bank
Do you have any one in New Zealand who you know who I can get advice for my home loan please
Thanks Ako, apologies as we are mortgage brokers in Australia and wouldn't be able to assist with mortgage in NZ I'm afraid
You can have multiple offset accounts.... up to 100 for some banks...
Yeah you can with Macquarie, CBA etc.
This paints such a negative on offset mortgages without saying any of the positives (coming from someone with an offset account) 1. you can choose whoever you get a credit card with in NZ ( we chose someone different to the home loans credit card of choice) 2. we don't pay credit card fees because we pay it off monthly 3. The credit card is not designed to get you in debt but save you interest so its actually extremely wise if you pay it off in time and dont apply for a credit card with yearly card holder fees. So no shivers down the spine... no annual fee to have an offset either... Keep in mind in his calculator example he used different interest rates, so you're not comparing apples with apples. Do you're own research :)
Thank you for sharing your thoughts and experiences regarding offset mortgages. It's great to hear that you've found an offset account to be a positive financial tool. You're absolutely right that there are benefits to offset mortgages that may not have been emphasized in the previous discussion.
Flexibility in credit card choice: As you've mentioned, with an offset mortgage in New Zealand, you can choose your credit card provider, which allows you to find the best terms and conditions that suit your needs.
Avoiding credit card fees: If you're diligent about paying off your credit card balance each month, you can avoid interest charges and potentially even annual fees, depending on the card provider.
Saving on interest: When used responsibly, an offset account linked to a credit card can indeed save you interest on your mortgage. By ensuring that you pay off your credit card balance in full and on time each month, you can take advantage of the interest-saving benefits without incurring additional debt.
It's important to remember that financial products and strategies have different advantages and disadvantages for different individuals, depending on their financial goals and habits. As you've advised, conducting thorough research and comparing options is essential when making financial decisions.
Thank you for sharing your perspective and reminding us of the importance of considering the potential benefits of offset mortgages. If you have any further questions or insights, please feel free to reach out.
redraw sucks as you can never claim it as a tax deduction should that property become an IP, guess depends on interest rate on offer. i think it cant be too hard to find a bank with a cheap int rate and offset
Thanks for watching
I have a fourth question. Do you have a partner that likes to blow your budget no matter how good you are at saving money? :)
Thank You for watching đ đ haha I'm not sure I understand your question?
Bank of Queensland has withdrawn their package because it was not beneficial for the price :)
It's possible to love a bank.... đ
đ đ hopefully more banks can follow