Home loan buffer

Any buffer you’ve built up in your home loan through facilities such as loan redraws and 100% offset accounts is a useful means to pay off your home loan sooner, save interest and ‘park’ your savings. 

But, they shouldn’t be used as a way to help manage future higher minimum home loan repayments or other regular household bills. 

Why? Building up a buffer in your home loan – that is making extra repayments above the minimum – is a great strategy, as it allows you to pay off your home loan sooner and pay less interest. 

It’s also a great way to fully maximise the benefits of any spare cash you might have now but know you’ll need in the future. 

These facilities – and the money you build up in them – really shouldn’t be used to help cover home loan repayments as rates rise in the future as that’s not what they’re intended for. 

So, what is a redraw facility and offset account?

A redraw facility on your home loan allows you to deposit extra money into the loan, generally in the form of higher ongoing loan repayments, that you can withdraw again when you need it. 

Some, but not all, lenders charge a fee to activate the redraw feature and/or a fee each time you redraw, so these costs need to be taken into consideration. As a result, it’s probably best used as a facility to save money for a significant future purchase, such as a new car, holiday or renovations, rather than accessing funds from it on a regular basis. 

With an offset account, the balance is offset against your loan. For example, if you have $10,000 in your offset account against your $300,000 mortgage, you actually only pay interest on $290,000. The more money you keep in the offset account, the more interest you save on the loan. 

Your offset account can also be used as a savings account for a significant purchase, or is often used by people to ‘park’ funds that they may need to readily access in the future – for example, a couple starting a family some time in the next few years may take advantage of this facility. 

If money is tight or you have concerns, talk to a mortgage broker

It’s important that you don’t borrow to fund living expenses. That includes drawing back extra you’ve repaid to help ‘top up’ your repayments in the future at a higher interest level. 

At the very least, you should always be covering the interest component, even if you can’t make principal repayments.  

If you’re concerned about the potential for rising interest rates, then a better strategy would be to perhaps look at fixing at least some of your home loan at a level you can afford, to provide that certainty. 

If you do start to find it difficult to make your repayments, then you’re better off talking with your Mortgage Choice broker about switching to interest only repayments for a period to buy you that ‘breathing space’.

If you can’t manage your ongoing financial commitments, including your mortgage repayments, then it’s time to restructure your affairs and/or change your lifestyle.

These features provide options

The thing to remember is that your home loan is always the cheapest form of finance. The key is to maximise the flexibility within the home loan as you go through the various stages of life.