Back To Basics On Home Loans
Newcastle Herald
Monday May 10, 2004
WHICH mortgage to choose often boils down to taking a home loan with redraw or a loan with a 100per cent offset account.
Both provide the flexibility to make extra payments and access the money later if needed.
The benefit is that the extra money is making a dent in the mortgage while it's there instead of earning next to nothing in a savings account.
There is little difference in the two products: 7per cent at the big banks and about 6.5at the non-banks.
``Redraw is not as flexible as offset. There are minimum withdrawal amounts and redraw fees can be quite stiff up to $50," said Denis Orrock, the general manager of InfoChoice.
``If you redraw $1000, you are paying 5per cent. That's quite expensive.
``And redraw takes time. You have to fax the institution ahead to request the funds," he said.
Offset accounts offer greater convenience but come with higher service charges up to $375 a year.
``Offset accounts are more expensive and unless you're on a good income, and it exceeds your commitments, it's not worth it. You need to work out what level of savings are kicking in," said Mr Orrock.
``Even if you are saving considerable amounts you have to decide whether you should be investing the money elsewhere for a better return.
``If you have large amounts sitting in cash then debt is not the biggest issue for you."
For people who have very little extra cash, a basic loan 6.32per cent with limited redraw is best. The extra repayments you can make may be limited, but if you don't have them to make, it doesn't matter.
Offset account - pros & cons
``Earning" 7per cent versus low rates in savings account (and it's tax free).
Instant access to the extra funds through the ATM.
Mortgage rate higher than basic loan and service fee may be high.
May be a penalty if you leave the loan in the first four years.
Redraw - pros & cons
Attached to most home loans, including fixed rate products.
Useful to unlock equity within the home for investment purposes.
Inconvenient: redraw can take time; not instant.
Fees may be as high as $50 and minimum withdrawal amounts of about $2000 may apply.
© 2004 Newcastle Herald
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