What is an offset account?
A mortgage offset account is a cash account that can act as your standard bank account with the ability to deposit, transfer and withdraw cash at an ATM and also set up direct debits (including you mortgage and credit card repayments). The balance of the offset account is used to reduce (or offset) the amount of interest charged on your home loan.
The amount of the reduction will depend on the terms of the loan. It can be:
the full rate of interest applied to the balance of the offset account; or
a pre-agreed rate applied to the offset account.
Offset accounts are useful in reducing the amount of your interest you pay. If you expect to have large amounts of cash sitting in a bank account it is worth considering including this feature in your mortgage. Any Interest you earn in a high interest savings account counts towards your taxable income which means it is usually far better off for owner occupiers to place any large amounts of spare cash into a mortgage offset account.
When your interest amount is reduced, your overall repayment amount remains the same but more of it goes towards repaying your loan (the principal). This means you can end up repaying your loan sooner.
The main drawback of having this flexibility is that loans with an offset account will typically have a higher interest than those that do not. Therefore if you don't expect to have much spare cash lying around for long periods of time, an offset account may actually be costing you.
Use our Offset Calculator to understand the impact on an offset account.
What is a redraw facility?
A redraw facility allows you to withdraw any extra money you've repaid. The amount you can withdraw is the difference between the principal balance was forecast to remain at that point in time and the lower actual amount outstanding.
This means that if you ever make additional repayments on your loan, you can withdraw that money when you need it. Using extra savings to pay off your loan will reduce the monthly interest owing on your account, as it is calculated off the remainder of the loan you have.
A redraw facility is not as flexible as an offset account as it is not a separate bank account that you can deposit your salary into or link direct debits. It is an actual repayment of the loan. Click here for an example.
Lenders may also have restrictions on the frequency and size of redraws.
Most home loans have this feature as standard.
What is an equity loan?
An equity loan involves a line of credit that provides homeowners with the ability to renovate or to buy a second property. Some lenders may provide a line of credit up to 80% of the value of the property
The major banks are cautious when approving equity loans, in particular when they have little evidence of what you are doing with the money. This is because there are a small number of individuals who do not use their equity responsibly or do not use the funds for the intended purpose.
The majority of lenders have a cash out policy which restricts the amount of money that you can release to as little as $10,000 to $50,000.
As part of the application process, you usually need to prove the purpose of your loan, with requirements varying depending on the lender, the amount you need and the purpose of your loan. Some examples of the evidence you may need to provide are:
Buying shares: An accountant’s letter, a copy of a plan or statement of advice from a financial planner.
Buying a property: A letter from your conveyancer confirming you are looking for a property or a copy of the contract of sale when a property is found.
Debt consolidation: One recent statement for each of your debts that are being repaid.
Renovations: A copy of the building contract or quotes from the contractors that you are using.
We only recommend that people take out a home equity loan if they are disciplined in the use of their money. Unfortunately, some people who apply for home equity loans end up spending the money on lifestyle expenses and have no plan of how to pay the money back.
Lenders find it more profitable to sell home loans with a line of credit as the interest rate is higher than that for a standard home loan. If you don't envisage requiring to borrow more money or consider you can save enough to money instead of borrowing more, an equity loan may actually cost you more.
What is a Professionals Package?
A Professionals Package is not restricted just to professionals (many borrowers are eligible). It is a term banks like to label certain home loan products that are packaged with other features such as offset accounts and credit cards.
A Professional Package can apply to a Variable Rate or Fixed Rate home loan.
A Professional's Package can be useful if the following applies to you.
You require an offset account
You require a new credit card
The interest rate on offer is lower than without the Professionals Package.