When it comes to managing your owner occupied home loan, two popular features often come into play: redraw facilities and offset accounts. Both have their merits, but they also come with their own set of drawbacks. Let’s dive into the pros and cons of each, and explore the psychology behind spending from these accounts.
Please note this blog chat is separate to investment lending (present or future) and should not be considered as personal advice. Always seek the help of a professional when determining what is suitable for your own personal financial situation.
Redraw Facilities
Pros:
Flexibility: Redraw facilities allow you to make extra repayments on your mortgage and then access those funds if needed. This can be a great way to reduce your interest payments while still having access to your money.
Interest Savings: By making extra repayments, you reduce the principal amount of your loan, which in turn reduces the interest you pay over the life of the loan.
Discipline: Since accessing funds from a redraw facility often requires a formal request, it can discourage impulsive spending.
Cons:
Fees and Restrictions: Some lenders charge fees for using the redraw facility or limit the number of redraws you can make.
Accessibility: The process to access funds can be cumbersome, involving paperwork or online requests, which might not be ideal in an emergency.
Psychological Barrier: Knowing that accessing your extra repayments is not as straightforward can create a mental barrier, making you less likely to use the funds even when needed.
Offset Accounts
Pros:
Immediate Access: Offset accounts are linked to your mortgage and function like a regular transaction account. This means you can access your money at any time via ATM, online banking, or EFTPOS.
Interest Savings: Every dollar in your offset account reduces the balance of your home loan on which interest is calculated, leading to significant interest savings.
Convenience: The ease of access makes it simple to manage your finances and use your funds as needed.
Cons:
Temptation to Spend: The ease of access can be a double-edged sword. It might tempt you to dip into your offset account for non-essential purchases, undermining your interest savings.
No Extra Repayments: Unlike a redraw facility, an offset account doesn’t encourage you to make extra repayments. Instead, it relies on you maintaining a high balance in the account.
Account Fees: Some offset accounts come with higher fees compared to standard transaction accounts, which can eat into your savings.
The Psychology of Spending
The way we perceive and use money in redraw facilities versus offset accounts can significantly impact our financial behaviour.
Redraw Facilities: The psychological barrier created by the formal process of accessing funds can be beneficial for those who struggle with impulsive spending. Knowing that you have to go through a few steps to access your money can deter unnecessary withdrawals, helping you stay disciplined and focused on paying down your mortgage.
Offset Accounts: On the other hand, the immediate access to funds in an offset account can lead to a false sense of financial security. It’s easy to forget that every dollar spent from your offset account is a dollar not reducing your mortgage interest. This can lead to more frequent and less considered spending, which might negate the benefits of having an offset account in the first place.
Conclusion
Both redraw facilities and offset accounts offer valuable benefits, but they also come with their own set of challenges. Understanding the pros and cons of each, along with the psychological factors at play, can help you make a more informed decision about which option is best for your financial situation. Ultimately, the choice between a redraw facility and an offset account comes down to your personal spending habits and financial goals.
Comments