Behaviour Traits: Choosing a Redraw Facility or Offset Account

The ‘paradigm’ theme presents again in how best to utilise cash savings against a mortgage in deciding whether a ‘redraw facility’ or ‘offset account’ will work best for you.

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Author: Jonathan Llewellyn – Financial Adviser - HFB Private Wealth

Mortgage Redraw Facility

This allows you to make extra repayments on your mortgage and then access those extra funds if needed.

Behavioural Impacts:

Savings and Repayment Discipline

Using a redraw facility might make you more disciplined in making extra repayments since accessing these funds typically involves a more formal process (e.g. logging into an online portal or contacting the lender). This can encourage a 'set and forget' mentality, leading to more consistent mortgage reduction. It is this discipline that formed that backbone of the baby boomer property wealth climb. It builds equity in your property and reduces cashflow available for discretionary spending.

Liquidity and Accessibility

The funds in a redraw facility are less liquid compared to an offset account. This reduced accessibility can be help those who are prone to impulsive spending, as it creates a psychological barrier to accessing the extra repayments.

Purposeful Use

Since accessing funds in a redraw facility often involves more steps, clients are more likely to withdraw money only for significant, planned expenses, which can encourage better financial planning and decision-making.

Offset Account

An offset account is a transaction account linked to a mortgage, where the balance offsets the loan principal for interest calculation purposes.

Behavioural Impacts:

Liquidity and Flexibility

Funds in an offset account are highly liquid. This flexibility can be advantageous for managing cash flow and unexpected expenses but might tempt some clients to dip into their funds more frequently, potentially reducing the overall interest savings.

Convenience and Usability

It is easy to access funds in an offset account. This dual-purpose use can streamline finances but may also lead to less disciplined savings behaviour.

Regular Deposits

Clients may be more inclined to deposit their salary and other regular income into an offset account, maximizing the interest offset benefits. This can make it easier to maintain higher balances in the account, effectively reducing the interest on their mortgage.

How to decide which one is best for you?

It is well worth your time to pause, consider your financial habits, goals, and discipline.

You have High Spending Discipline

An offset account can be highly beneficial, offering both interest savings and liquidity. For those who can manage their finances effectively while keeping substantial funds in the offset account.

You are Prone to Impulse Spending

A redraw facility might be more suitable due to the added withdrawal barriers, helping them avoid the temptation of easily accessible funds and ensuring extra repayments stay on the mortgage longer.

It is worth considering your financial behaviours and goals before committing to one path. While it is not difficult to change your strategy in the future, it may be challenging to change your behaviour.

If our private wealth team can help you please drop us an email at team@hfbgroup.com.au.

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