Award-winning mortgage specialist on offsets, redraws and renovation financing

There’s a lot more to a home loan than just the interest rate.

The features of the loan can also have a big impact on your total mortgage costs and repayment flexibility, which is why it’s important to understand the potential benefits of a redraw facility and an offset account.

Redraw and offset have one thing in common – they reduce the amount of interest you get charged. If, for example, you have $500,000 outstanding on your loan and $40,000 in either redraw or offset, you’ll be charged interest on only $460,000 (i.e. $500,000 minus $40,000).

But there are subtle differences between the two features, according to Helen Avis, Director of Finance, Specialist Mortgage, who has just won her fourth successive WA/NT Broker of the Year Award at the Specialist Finance Group’s 2024 National Awards.

Redraw loan facility

Redraw is a facility that sits within your loan. The way you accumulate money in redraw is by making extra home loan repayments. The lender will allow you to borrow back (or redraw) these extra repayments, subject to certain conditions. But because this money belongs to the lender, it’s technically possible the lender might decide one day not to allow you to reclaim the money, or change the conditions of redraw.

Offset accounts

Offset is a separate transaction account that’s linked to (but separate from) your home loan account. The way you accumulate money in offset is through deposits – for example, salary payments. The money in your offset belongs to you, so the lender can’t prevent you accessing it.

Overall pros and cons

Pros: you can use redraw and offset to reduce your interest bill and pay off your home loan sooner.

Cons: your lender may charge you a higher ongoing fee or higher interest rate to access these loan features. Also, you may be charged a fee for each redraw transaction.

Financing renovations

Renovations are incredibly popular, with homeowners investing $2.84 billion on alterations and additions in the June 2024 quarter, according to the Australian Bureau of Statistics.

Typical costs range from about $2,000 to $5,000 for bedrooms, $15,000 to $30,000 for bathrooms and $25,000 to $50,000 for kitchens, according to JDL Constructions.

Helen Avis’ financing tips:

Here are three ways to finance your renovations:

• Take out a construction loan. With a construction loan, the funds will be distributed in stages throughout the project, rather than in an upfront lump sum, and you’ll be charged interest only on the funds you’ve already received. Your construction loan will be interest-only during the building phase and will then revert to a standard principal-and-interest home loan once the building has been completed.
• Take out a personal loan. Compared to a construction loan, the application process is likely to be faster and your chance of approval is likely to be greater, but your interest rate is likely to be higher as well.
• Pay cash. This is the simplest option. If you’re thinking about paying for the renovations with a credit card, be careful. While you will not have to go through an application process, the interest rate will be extremely high and could leave you susceptible to falling into a debt trap.