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Using the redraw on a mortgage as your savings account?


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#1 audrey09

Posted 25 November 2012 - 09:11 PM

I'm confused!

I will have a mortgage soon and have been told by many people that it's best to put all your extra savings onto your mortgage and then you have access to the extra money you have added from the redraw. So it's there when you need it. Like a savings account. Of course with the right mortgage.

Does this defeat the purpose of paying more off your mortgage in the first place if then I will go into the redraw and take out what i need? Would I be going backwards and be undoing all the interest savings I've made once I withdraw the money?

I'm asking this because if I use my mortgage as a savings account also, that money is being saved for a purpose so it's going to be withdrawn at some point....could be 1 year or 2 or whatever.  
So is it better to have a specific savings account instead or is it better to put it on the mortgage to save interest even though you know that money is only sitting there temporarily?

Hope this makes sense!!


#2 katrina24

Posted 25 November 2012 - 09:18 PM

There are lots of different ways to set up a mortgage. I would seek some advice from the bank or a professional about your specific situation.

We use a line of credit (which is part of our mortgage) as our everyday/savings account. Lots of people have an offset account - while the money is in there it reduces the interest paid.  



#3 pitzinoodles

Posted 25 November 2012 - 09:18 PM


If you put all your savings into the mortgage, you will save interest for the whole time it is in there.

Assuming you don't get charged fees to get it out, and you can't get a better interest rate on a term deposit (you won't!) then you will be better off.

As an incentive, it is harder to redraw, than just take it out of an ordinary account, so hopefully that will prevent you spending it till you really need to.

#4 Julie3Girls

Posted 25 November 2012 - 09:24 PM

If the money is sitting against your mortgage, for that time, you are saving yourself interest on the mortgage.

Most of the time, the amount of interest you save if a fair bit more than the interest you would earn in a savings account.
The interest on a savings account is usually a very low percentage, and it's also taxable income.

Once you redraw the money, yes your interest payments will go back up a bit because your mortgage has gone back up. But you have still saved yourself money in the time it was in there.

We have an offset account, which I like. The mortgage payment still gets made directly to the mortgage account, but everything else goes into the offset account. Which reduces the amount of interest we pay on the mortgage. And we can treat the account the same as any other saving account.

#5 audrey09

Posted 25 November 2012 - 09:25 PM

Thanks Guys I will definately be getting proper advice. I've spoken to my broker about it and i'm looking into different home loans with this lender.

Pitzinoodles, that's what I don't understand. I know interest is being saved while the money is in there BUT what happens when it's time to take that money out for whatever it is that you've been saving for?
Do you go back to square one?

#6 SeaPrincess

Posted 25 November 2012 - 09:25 PM

You can only redraw extra payments.

While the money is in the mortgage, it is reducing your interest.  If you haven't paid any extra, you can't redraw.

We have both a free redraw facility and an offset account. We pay extra each fortnight into the mortgage, plus whatever is in our normal account is also offsetting the interest on the mortgage.  I like to transfer money to the mortgage and keep the redraw amount going up, but this way, no matter where the money is, it is working for us.

R

#7 harryboy

Posted 25 November 2012 - 09:31 PM

You should pay exactly what you have to off the mortgage and build up the rest in an offset account, especially if in the future this property becomes an investment not your place of residence. As PP said, money is still working for you in offset.

#8 Foogle

Posted 25 November 2012 - 09:33 PM

There is a difference between an offset account and a redraw account.  From a tax point of view they are treated differently. Talk to your financial advisor about which would suit your situation better.

I've done a quick google and found this report about the difference.






#9 Acidulous Osprey

Posted 25 November 2012 - 09:36 PM

Interest is calculated daily on your mortgage account so every day you have extra money in there the interest is less.  Once you take the  money out the interest is calculated on the new balance.  It does not reset and you are not penalised.

Just understand that it is the daily balance that is what matters.

#10 BetteBoop

Posted 25 November 2012 - 09:36 PM

We have a mortgage with a redraw facility. It simply means you can pull back any money you've paid above the minimum amount for that time.

So if you pay $100 pw extra on your mortgage, after 1 year you will have an extra $5200 in mortgage repayments that you're allowed to redraw.

We also have an offset account. All of our income goes into this account and the account balance directly offsets how much money we pay in interest on our mortgage.

I recommend both products. They're the most popular options, but a redraw facility can get you into real trouble if you're not good with money. The money is just too easy to redraw.

#11 jayskette

Posted 25 November 2012 - 09:42 PM

specific savings account  vs redraw is just like paying off debt off 1 credit card (highest interest rate) completely first vs paying a bit of debt off each of your credit cards. In both cases, one option is clearly the smarter/more logical choice, but the second one may be psychologically better for some people's mindsets.

#12 intd242

Posted 25 November 2012 - 09:44 PM

I'd go with the offset ... if you put all your savings into the loan expecting to use the redraw and you end up turning it into an investment property it can get messy!!

#13 audrey09

Posted 25 November 2012 - 09:45 PM

There are things that I'd like to save up for like holidays, education costs, maybe renovations etc.
I will be needing to redraw this money out because it is being saved up for a goal, not just to sit there forever unfortunately!

I'm a single parent too so it's only my wages going into the account.
When people talk about redraw accounts they sound great but the thing is I WILL be redrawing this money if I use it as a savings account because I'm saving for something.



#14 PatG

Posted 25 November 2012 - 09:48 PM

I have no intention to turn my house into an investment and I have a no fee redraw loan.  I pay my credit card out of it each month and so far that has been the only redraws but I know i have a stack of money there I can use if I suddenly need a new fridge or repairs on the house.  I wish I had an offset account though because I have to keep money in my transaction account ready to pay the obligatory mortgage payment each week and that isn't decreasing the interest in the days between pay day and mortgage repayment day.  I'm with Commbank and they don't offer a real offset account.

#15 intd242

Posted 25 November 2012 - 09:51 PM

I had not intention to turn my house into an investment either, but things do have a tendency to change. On reflection, I should have gone with an offset.

#16 soapy

Posted 25 November 2012 - 09:57 PM

If we have money sitting in our accounts I put them onto the mortage. Keep a spreadsheet the savings you have put in there so you know what's what.

#17 bluedragon

Posted 25 November 2012 - 09:57 PM

Any extra money in either an offset account or available for redraw is reducing the amount of interest you pay while it's there. So you can think of it like the extra interest you would have paid if the additional money wasn't there has been paid off the principle instead. This in turn reduces the amount of interest paid in subsequent payments.

So even if you take the money out at some point the benefit of having it there for that time continues and you will always be better off.

#18 Overtherainbow

Posted 25 November 2012 - 09:59 PM

If you have $10 000 in savings sitting on your mortgage or in an offset account, you'd save $50 per month (at 6%) until you withdraw it.  You will not be paying any tax on that $50 and there are few savings accounts offering %6.

Negative, easy to withdraw, if you have it as an investment later savings may be better elsewhere, you may have withdrawal fees.

#19 bailee

Posted 25 November 2012 - 10:10 PM

QUOTE (intd242 @ 25/11/2012, 10:51 PM) <{POST_SNAPBACK}>
I had not intention to turn my house into an investment either, but things do have a tendency to change. On reflection, I should have gone with an offset.

To this and those posts saying you should get an offset account, redraws are not fixed in stone. You can redraw the balance and start from scratch without any dramas. It is not hard. And while  some people go from a home loan to an investment property, most do not, it is hardly a reason to recommend an offset account over a redraw facility.

We use a redraw facility and it works really well. I share my loan with my sister not a partner so an offset account is not suitable for us. We started with only $20 extra per fortnight by rounding up our repayments. Interest rates went up at one point and we have kept up that maximum payment amount now for a few years so we are no well ahead. Each dollar in the mortgage saves us interest each month. So as you reduce the principle you reduce the interest you and and tht difference further reduces your principle and increases your extra payments. We redraw for all sorts of reasons. We don't have a minimum redraw amount or fees to pay so ours is really flexible. We have never had to redraw everything in there, there is always more than we need because we re constantly saving on interest payment. There is no disadvantage to this option unless you have penalties, such as high redraw fees, high minimum redraw amounts or a higher interest rate for the privelidge (but we dont have any f that).

Sorry about errors, dumb iPad.

Edited by bailee, 25 November 2012 - 10:13 PM.


#20 audrey09

Posted 25 November 2012 - 10:16 PM

Initially there won't be large amounts like $10,000 sitting in there. I will work towards that by paying more with time.

I wasn't sure if the benefits are worth it for people who don't have huge amounts in the offset. With CBA there is a yearly fee of approx $350 to have the offset account, it's hard to work out if it will even be saving me this amount per year in interest.

#21 CallMeFeral

Posted 25 November 2012 - 10:33 PM

Audrey09, I think it's worth shopping around to find somewhere with either a redraw OR an offset account cheaply (both will have a similar interest saving). Mine costs me about $70 a year - $350 seems excessive.

In terms of what you're saying regarding withdrawing it and going back to zero, the best way I can describe it is:
- when you make a scheduled payment, some of it goes to interest (I), some of it pays the original borrowing (P)
- the amount that goes to each depends on how much interest you are liable for that month, which in turn depends on how much of the original borrowing there is left to be repaid. Over time, P gets smaller and smaller, which in turn reduces the interest, which in turn then increases the amount that gets paid off P. Towards the end of your load you'd be paying off mostly principle, at the beginning, mostly interest
- the more that goes to interest, the less goes against the initial borrowing
- by paying less interest at any given time, your original borrowing gets a little bit more paid towards it - THAT is the benefit that stays, even after you withdraw your money again. The reduction on interest in those few months that your money was there, means that a little bit more of your repayments went to reduce your P amount during that time

Hope that helps!

#22 SNT349

Posted 25 November 2012 - 10:38 PM

Your repayments will be calculated based on the amount you borrow initially.  If you pay more than the required amount, your loan will be in advance by that amount.  The repayments include the interest as well as some capital.  So say you borrow $200,000, the repayments will be based on that and if your loan is in advance by say $2000, then you only pay interest on $198,000 but your repayments stay the same.  So you are in effect paying more off your capital.  So the more in advance you are, the less interest you pay (even if only for a short period).

You should also check if there is a fee for redraw or a minimum amount.  Ours is $25 per redraw and you have to withdraw at least $2000.

Hope that makes sense.

#23 audrey09

Posted 25 November 2012 - 10:47 PM

Thanks so much ladies!  original.gif
I have many questions for my broker at our next meeting!

#24 SeaPrincess

Posted 26 November 2012 - 12:00 AM

QUOTE (audrey09 @ 25/11/2012, 08:16 PM) <{POST_SNAPBACK}>
With CBA there is a yearly fee of approx $350 to have the offset account, it's hard to work out if it will even be saving me this amount per year in interest.

A good broker should be able to tell you what sort of amount you need to keep in offset to make it worthwhile.  When we got our first mortgage, we asked about an offset account and the rep told us that because the mortgage product with offset had a higher interest rate, we needed to have roughly $10,000 in the offset as a minimum. We opted for their lower interest product with free redraw.  We do have a minimum redraw amount, but since there's no minimum to pay in, we just redraw the minimum, then put the rest back in.

R

#25 Coffeegirl

Posted 26 November 2012 - 07:07 AM

We have 2 mortgages one fixed interest, and one variable with an offset account, as well as our day-to-day saving account.  We fixed a little over 50% of or full amount as we were unsure of where he interest rates were going and we like the certainty of knowing what we owe from month to month.

My wage goes into the general savings account and is used for day to day things.  Groceries, smaller bills, gifts etc and smaller bills.  

Dh's wage (much larger than mine) goes into the offset and we have direct debits come out for larger bills like electricity, PHI, insurances etc.  The left over money just sits there and works towards offsetting some of the interest on the varianle mortgage.    Every month or so, if we have it, we put $500-1000 into the redraw part of this mortgage.  Our minimun amount to redraw is $2000 from our bank so we like to have a smaller amount sitting in the offset for smaller emergencies (like a hot water tank, or plumbing problem)

The fixed mortgage just sits there and we pay the fixed payments fortnightly

Our bank doesn't charge us any extra annually for the redraw or offset, but this is probably more to do with the size of our mortgage.   We do pay $350 a year for 'admin fees' or some odd thing and a$5/mth acct fee on the offset.  So $60/year.  

You aren't confusing the annual mortgage account fees for the entire mortgage with the offset account fees maybe?


Spelling sucks, in a hurry and can't be bothered fixing it.

Edited by Coffeegirl, 26 November 2012 - 07:09 AM.





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