Most home loans in this day and age come with a redraw facility or offset account. They’re handy tools to help you get the most out of your mortgage, adding flexibility and minimising interest. However, they don’t do the same thing, so it’s worth understanding how they actually work and the differences between them before you sign on the dotted line.
Redraw vs offset accounts at a glance
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What is it?
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A mortgage feature that's part of your loan.
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A bank account linked to your mortgage.
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How do you save?
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It allows you to make extra payments on your home loan, reducing your mortgage balance and term length.
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The more money you have in your offset account, the less interest you'll pay on your home loan.
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Which mortgages offer these?
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Almost all home loans with variable rates and some with fixed rates come with redraw facilities. However, loans on fixed-rate terms often have limits on extra repayments.
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Most variable rate home loans offer offset accounts, but fewer fixed rate home loans do.
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Associated cost?
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Some lenders charge a redraw fee each time you access your funds, but this is more often the case in-branch than online.
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Some lenders might charge an annual fee for using an offset account or a higher interest rate on your home loan.
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How is money accessed?
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You can access your funds by withdrawing money from your redraw facility and moving them to another account.
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You can access the money the same way you would with a regular bank account, such as via instant transfer or debit card.
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Withdrawal limits?
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Accounts may have a minimum redraw amount as well as a minimum account ‘credit’, such as enough to cover the next repayment.
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You can withdraw any amount of money up to the total amount in your offset account.
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What is an offset account?
An offset account is essentially a bank account linked to your home loan. All the funds in that account offset the balance on which interest is calculated, hence the name. For example, a home loan with a $300,000 balance and $50,000 in an offset account would only have interest charged on $250,000. However, it still works like a regular bank account, meaning you can access the funds and deposit into, and withdraw from, your account whenever you like.
The result of this is that you can reduce the interest payable on your home loan, potentially saving tens of thousands of dollars. For instance, on a $500,000, 25-year home loan at 5.50% p.a., keeping $20,000 in your offset account for the duration of your loan would save you almost $55,000 and shave nearly 18 months off your loan term.
What is a redraw facility?
A redraw facility is a home loan feature that allows you to make additional payments towards your debt and withdraw them if you need to without the need to refinance your mortgage. Making extra payments means your loan balance falls more quickly, resulting in shorter loan terms and less interest. However, having the flexibility to withdraw them when needed can give you greater peace of mind that you’ll have access to extra funds if you find yourself in a bind.
As an example, using the same $500,000, 25-year mortgage at 5.50% p.a. as before, paying just $100 extra each fortnight would see you save just over $62,500 overall and pay off your loan three and a half years early. By the end of your term, you’ll have built up over $55,000 in your redraw facility. It’s worth noting that if you do redraw on your mortgage, your interest will increase again, as your loan balance will drop.
The pros and cons of offset accounts
Pros
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Reduced loan interest
The number one benefit of having an offset account is the money it helps you cut down on your mortgage interest, which can add up to four or five-figure savings.
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Convenient access to funds
Because it’s a bank account, you can deposit funds and withdraw them instantly at any time without having to go through any long process.
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Unlimited accounts available
Some banks offer unlimited offset accounts, which can be useful if you want to split your transaction account from your savings account.
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Tax benefits for investors
Offset accounts offer potential tax advantages for investment properties, since they don’t directly reduce the loan balance and preserve tax-deductible interest.
Cons
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Requires high balance to have a big impact
If you’re someone who has very little in savings to deposit into an offset, the benefit may not be as great, especially when annual fees are deducted.
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Annual fees to access offset
Offset accounts aren’t usually free, so you could find yourself paying around $400 for the privilege each year of your 25 to 30-year loan term.
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Stronger temptation to spend
With such easy access to your money and no real restrictions on withdrawals, you may be tempted to spend more with an offset than a redraw facility.
The pros and cons of redraw facilities
Pros
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Reduced loan interest
Paying extra on top of your home loan instalments helps you cut down on the interest you pay. Even a small amount each fortnight or month can make a big difference.
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Flexibility to pay down your loan faster
Not only does it help you save on interest, but it also shortens your loan term, allowing you to clear your debt sooner than you otherwise would’ve.
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Accessible funds when you need them
Whether you’re faced with costly emergency repairs to your home or are looking to invest in another one, redraw facilities store your funds for when you need them.
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“Save” at a higher rate
Rather than putting your cash into a savings account, you can chip away at a higher-interest debt and get more value for your money.
Cons
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Withdrawal limits
You may not be allowed to withdraw the full amount in your redraw facility. For example, some lenders require you to keep enough to cover your next mortgage payment. You may also need to withdraw a minimum of $500 to $1,000.
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Redraw fees
Some lenders will charge you a fee each time you access your funds. This serves as a disincentive to access your funds. However, other lenders allow you to do this for free.
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Unavailable and less useful for fixed interest rates
It’s generally harder to make extra payments with a fixed interest rate, with more restrictions and potential fees in place.
Which one is better for you: a redraw facility or an offset account?
No – the money in your redraw facility or offset account reduce the interest you’ll pay on your loan, but not the payments themselves. While making additional payments does reduce the loan balance, you’ll need to refinance your loan if you wish to take advantage of the lower repayments.
On the other hand, with offset accounts, you’ll have to actively pay the balance of your offset account into your home loan (such as into your redraw) to make you eligible to refinance to a lower payment.
So, which is the right option for you?
Whether a redraw facility or offset account is more useful for you comes down to your situation and preferences as a mortgage payer. Here are some scenarios where one may be more suitable than the other:
- If you want to stockpile your funds for a rainy day while reducing your interest, redraw facilities are more suited to that.
- If you need daily access to funds for depositing and withdrawing cash, an offset account can fill that role.
- If you’re a property investor, using an offset account allows you to reliably maintain the purpose of the loan, according to Bankwest Chief Customer Officer Paul Vivian. If you take money out of your offset account, any interest charges can still be claimed if they’re used for the right purpose and producing assessable income. It’s worth seeking independent tax advice if you aren’t certain about your potential deductions.
- If you don’t have much in your savings account and can only contribute a little bit extra each pay cycle, a redraw facility may be more worthwhile.
- If you have money invested in other areas that deliver a higher return than your lender charges you in interest, using your redraw is likely to be more suitable than an offset.
It’s important to note that if you’re looking at home loans with offset accounts bundled in, you should always check the comparison rate. That will give you a clearer picture of the true cost of your loan before any interest savings are made by depositing in your account. Redraw facilities won’t impact your comparison rate, as only conditional fees apply.
Can I have both a redraw facility and an offset account on my home loan?
Yes – plenty of home loans are equipped with both features. Whether you use one, the other or both comes down to which option you prefer: paying down your loan debt and putting your money away for a rainy day or keeping full banking access at all times.
