Over the years we’ve often discussed home loan offset accounts and the financial planning flexibility this common facility can provide.
In this article, we review the benefits, explain what makes an offset account different from a redraw facility and address whether you should, or shouldn’t, close your offset account once your home loan is fully offset.
It’s important to understand how an offset account and redraw facility differ.
Generally speaking, a home loan redraw facility is part of a home loan agreement, whereas an offset account is a separate account that has been linked to the home loan.
A home loan redraw facility enables paying more than the minimum loan repayment to the loan which reduces the loan balance and the interest payable. Then if needed, that money can be redrawn in accordance with the lender’s terms.
When it comes to using an offset account, like the redraw facility any amount of extra money can be held in the offset account. The balance of that account offsets the interest payable but doesn’t actually change the home loan balance.
While similar, the differences can be considerable.
For example, redraw facilities as noted earlier, can have conditions that may limit the amount of funds that can be redrawn. There may also be extra fees and in some circumstances, the redraw request can be denied by the lender.
Because an offset account is essentially a savings account that’s linked to, but not part of the loan, it generally isn’t affected by those type of restrictions, so when you need fast access to money for dealing with an emergency or an opportunity, you simply withdraw the money.
However, the pressing question for many people whose offset account savings fully offsets the balance of their home loan is: What next?
The answer is that depends.
For some people, using the offset account money to repay the home loan in full, provides a sense of completion as they finally, often after 30 years, pay out the loan.
For others it can be a necessity, because having all that cash accessible in an offset account presents too much of a temptation for spending on things that were not part of a planned strategy. For them, their financial health can depend on finalising the loan and discharging the mortgage.
Of course, when the offset balance equals the debt balance, the interest payable on the loan is zero and loan repayments will continue (in this scenario, 100% of the loan repayments will be principal repayments so the loan will pay down more quickly) so keeping the loan structure active can do no harm, but it can also provide future financial opportunities.
Funds from an offset account can provide short term private funding for a private purchase such as a motor vehicle, but it can also be part of a good debt strategy for purchasing tax deductible assets.
These types of opportunities are usually limited or not available via a redraw facility.
We’ve written about the ‘good’ debt opportunities created by an offset account previously, you can revisit this article here.
However, keeping an offset account active can have a more fundamental purpose. It simply provides access to cash when you need it.
This is especially true for pre-retirees or retirees who due to their age and limited time left in the workforce, may not easily qualify or qualify at all, for a new loan.
Even if they do qualify, there’s the added expense of loan application fees and other costs. Retaining the existing loan structure would simply avoid the re-establishment fees.
Maintaining a home loan and offset account does mean however, the bank will continue to have security over the home asset and therefore the possibility that in some circumstances the home could be sold to repay an outstanding loan balance. If this were the case, it could be avoided by using the offset account to repay the loan account. Naturally, advice specific to the circumstances would be required.
Your next steps…
Debt management is integral to successful financial planning and what’s right for you should be considered in context of a range of matters.
This would include giving consideration to your requirement for future access to funds or your desire or expectation to help family members financially.
Tax implications, your attitude to debt and your commitment or discipline to debt management will also need to be carefully considered when deciding to keep or close your loan structures.
May we suggest BEFORE taking any action, give us a call to discuss the pros and cons for your circumstances.
As we’ve highlighted here, once your loan and offset account close, the ease and cost of reinstating finance could be difficult, costly or just not possible which could leave you financially stranded should you need money in a hurry.
To learn more about offset accounts, managing debt and financial planning for achieving what really matters, please contact Brett Cribb, Steve Nicholas or James Marshall on +61 (0)7 3007 2007 or emailing info@stratusfinancialgroup.com.au and we’ll Make it Happen.
Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth ABN 54 139 889 535 AFSL 357306. This information does not consider your personal circumstances and is of a general nature only. You should not act on it without first obtaining professional financial advice specific to your circumstances.
*Please note: Credit advice is not offered under the Fortnum Private Wealth AFSL. When required, we refer to appropriately qualified professionals.