What is a redraw, a line of credit and an offset account?

Answer

Getting a home loan can be exciting but if you’re not up to speed on what you need to know, it could be a stressful and exhausting experience.

In this jargon-buster, we look at the meaning of some common terms to help you understand what to look out for when you’re applying for, and paying for, a home loan. We’ll look at a redraw facility, a line of credit and an offset account – what they are, why you would use them and what to look out for.

Redraw facility

What is it?

If you make extra repayments on your home loan, a redraw facility lets you take the extra money out again if you need it. So rather than saving your money in a separate account, you can reduce the amount of interest charged on your loan―by paying more than you have to—and access the extra money when you need it.

Why would you use it?

A redraw gives you extra cash to do things like pay bills or do renovations without having to apply for another loan. You can use it as many times as you like to draw down money, as long as you don’t exceed the credit limit on your loan.

Watchouts

The downside of a redraw facility is that there could be fees or withdrawal restrictions placed on the amount you can redraw. The upside of this is it prevents you from making too many withdrawals and might help stop you from spending more money than you can afford.

Line of credit

What is it?

A line of credit is a home loan which allows you to draw funds as you need them up to an approved credit limit. Line of credit home loans are also known as revolving line of credit or equity line of credit loans.

Why would you use it?

One of the main reasons to use a line of credit is because it is flexible, your money is at call and you only pay interest on the portion of the loan you've used.

Watchouts

Generally, a line of credit is more expensive than other home loans, so, if you feel this type of home loan is for you, you might consider having a line of credit for a proportion of your home loan rather than the whole amount.

You also need to be disciplined with a line of credit because you can use it to pay for other purchases (such as holidays, everyday living expenses etc) which means you could end up paying interest to fund your lifestyle for many years to come.

Offset account

What is it?

An offset account is an everyday savings account which is typically linked to your home loan. You can also use it to deposit your salary into the account to help you make payments on your home loan.

Why would you use it?

An offset account could help you save thousands of dollars over the life of your home loan.

How does it work?

Let’s say you have a $325,000 home loan with an interest rate of 5.20% p.a. If you keep $2,500 in your offset account, you’ll only pay interest on $322,500 of the loan.

This will add up over time – so not only will you pay off your 30-year home loan five months earlier, you’ll also end up saving $8,9231.

Watchouts

Offset accounts are often only available with variable home loans and can have account-keeping fees. You need to be careful that you won’t end up paying more at the end of the term than if you had taken out a basic home loan with a low interest rate.

Need more help?

Find out more about different home loan options. Consider contacting your financial adviser or home loan specialist to help you understand the impact of each option before you decide what path is right for you.

If you need help finding a financial adviser call us on 13 12 67 or find more details here.
 

1. Calculations are illustrative, do not represent actual rates or products, and are based on an interest rate of 5.20% p.a.

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© AMP Life Limited. This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.