Home loan features that might work for you

Redraw and offset features haven’t been a big thing in New Zealand until now, but they’re becoming more popular – and with good reason.

Our ratings this year showed that redraw and offset features are becoming more readily available in New Zealand. So what are they and how can they help diligent savers to pay off their home loan faster and more easily?

What is a redraw facility?

A redraw facility is a feature available on some floating rate loans. It allows you to withdraw money that you’ve already contributed to your home loan. The balance of the redraw facility is whatever extra payments you have made towards repaying your loan.

The benefits of a redraw facility are that your contributions to your home loan remain accessible and aren’t locked away in the event of an emergency bill. As long as you diligently make each required monthly repayment, any extra money you add to the account will lower your loan balance and can be withdrawn later if needed. The other benefit of a redraw facility is the fact that your extra repayments reduce your principal amount, so you end up paying less interest.

Of course, there are a few things you need to be aware of. When you redraw money, there is a fee charged (“redraw fee”) and you can only withdraw up to a certain amount of money. This isn’t necessarily a bad thing, since it discourages redrawing too often and encourages saving instead.

There are also limits on how many redraws you can make each year. So the extra money you put in the redraw facility should be just that – extra money. You don’t want to wipe out your budget by paying extra money and then end up needing to redraw it just a few weeks later.

Out of the 10 institutions we consider for the Residential Floating home loan profile, the following two institutions offer a Redraw Facility:

  1. BNZ
  2. Westpac

What is an offset?

An offset account is an everyday transaction or savings account that is linked to your home loan. The money in your account is “offset” daily against your loan balance, meaning that less interest is charged on your loan.

The main benefit of an offset account is that the money remains accessible on a day-to-day basis because it is in your transaction or savings account. You just have to make sure that you keep enough money in your offset account to make your monthly repayments to your loan.

Look for a home loan with a 100% offset facility. Out of the 10 Institutions we consider for the Residential Floating home loan profile, only the following institutions offer a 100% Offset Account:

  1. BNZ
  2. Kiwibank
  3. Westpac

Offset vs. Redraw

Redraw and offset facilities are quite similar in principle – they allow you to use your savings to reduce your loan balance while still keeping some access to those savings as needed.

The main difference between the two facilities is that with an offset, the money in your transaction or savings account is at-call and easily accessible day-to-day, whereas the money in a redraw facility is not at-call and is only accessible for a certain number of withdrawals.

There is also a fee for redrawing money, whereas an offset account only has the fees your transaction or savings account would have anyway.

When choosing between an offset or redraw facility, you must decide for yourself what is more useful for you:

  • Reduce the interest on your loan while maintaining day-to-day access of your cash: A mortgage offset account offsets the interest owing on your account and you still have daily access to the money. This will suit someone who wants to minimise the interest they owe on their repayments.
  • Pay off the loan principal itself: By paying the money directly into the loan, a redraw facility allows you to make payments towards paying off the principal balance of your loan, rather than simply reducing the interest you pay. This will suit someone who wants to pay off their mortgage sooner.

Whichever type of facility you use, any extra money that you can pay onto your mortgage can save you significant money in the long term in interest savings.

CANSTAR’s star ratings system helps you compare home loans by selecting which features they do or do not include, so you can filter your search to look for the home loan that would best meet your needs.

In 2016, we researched and rated 58 home loan products from 10 providers in New Zealand. Take a look and find out if there’s a home loan out there with a redraw or offset facility that could offer you outstanding value.

 

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