Parking money 'inside' a mortgage trusts that your bank will let you have the extra money when you need it.Credit:Jim Rice
However,having your cash"alongside"your loan uses a separate but attached offset account to effectively quarantine your extra payments,giving you full flexibility of access.
The safer offset approach saves an identical amount of interest.
Since Australia went on emergency lockdown to halt the spread of coronavirus in mid-March,I've heard so many tales of the redraw strategy blowing up in mortgage-holders'faces.
Unlike when you have made all extra repayments into (and hold any savings in) a parallel offset account,some people who have extra money inside the loan itself are being refused the same mortgage payment"holidays"offered to other bank customers.
"You are ahead:you can use these funds to meet your monthly obligation,"lenders are saying.
I broke the story in mid-2018 that CBA was about to"sweep away"redraw monies.
This would occur when a customer's repayments had somehow fallen behind what was necessary to discharge the loan in the contracted term. Or when they were ahead but were suckered into a"generous"offer to reduce their minimum repayments – the newly calculated amount would see this money eventually gobbled up.