Managing your home loan effectively can make a significant difference in how much interest you pay overtime. Two popular features available to Australian homeowners are redraw facilities and offset accounts.
While both can help you save on interest, they work in different ways and suit different types of borrowers. So, if you can’t choose between the two (or whether to go with both), we’ve broken down the ins and outs of each option in our comprehensive guide!
Redraw vs offset accounts at a glance
| Redraw | Offset | |
|---|---|---|
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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, therefore reducing your mortgage balance.
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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 variable rate home loans and some fixed rate home loans offer redraw facilities. However, fixed rate loans 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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You can usually redraw money online for free, but there might be a fee if you do it in-branch or over the phone.
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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 usually access the money in your offset account the same way you would with a regular bank account, like using a 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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*The principal is the amount you have borrowed from the lender, while the interest is the regular fee charged for borrowing it.
What is a redraw facility?
A redraw facility is a feature attached to your home loan that allows you to make additional contributions on top of your minimum scheduled mortgage repayments and access them. Extra repayments directly reduce your loan balance, which lowers the amount of interest charged over the life of the loan, but the redraw also gives you the flexibility to retrieve these funds later if you need them.
For example, if your outstanding loan balance is $300,000 but you’ve made $20,000 in extra repayments, the lender calculates interest on the reduced $280,000 principal. This balance may be redrawn, or “reborrowed”, in minimum increments down to a set minimum balance. For example, your lender may require $1,000 remain in the account to cover the next repayment period, as well as allowing minimum redraw increments of $1,000.
The following table shows how much you can save by making additional repayments:
| Loan amount | Loan term | Interest rate | Fortnightly repayment | Additional payment | Total interest paid | Interest saving | Time saved |
|---|---|---|---|---|---|---|---|
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$500,000
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30 years
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6.00% p.a.
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$1,383
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$50
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$517,018
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$61,656
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Two years, eight months
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$500,000
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30 years
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6.00% p.a.
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$1,383
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$100
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$468,544
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$110,130
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Four years, ten months
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$500,000
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30 years
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6.00% p.a.
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$1,383
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$200
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$396,451
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$182,224
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Eight years, two months
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Redraw example
| Building and accessing your redraw balance | Key considerations for using redraw |
|---|---|
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Sarah has a variable rate home loan with a minimum monthly repayment of $1,200. |
Eligibility: To access redraw, you must meet your lender's specific eligibility criteria. |
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To accelerate her loan repayment, she consistently pays $1,500 each month. This extra $300 accumulates as a redraw balance. She is now $6,000 ahead on her repayments. |
Minimum and maximum limits: Lenders often set minimum and maximum redraw amounts per transaction. For instance, you might be able to redraw a minimum of $200 and a maximum of $100,000. |
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Sarah wants to renovate her kitchen. She can use her redraw balance to fund this renovation. However, she needs to ensure she maintains an account balance equal to one repayment to stay on track with her loan. |
Impact on repayments: Using redraw increases your loan balance, which in turn, increases the interest portion of your repayments. If your goal is to pay off your loan faster, using redraw might not be the most effective strategy. |
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For example, with $6,000 account credit, she may redraw up to $4,800. |
Complex scenarios: In certain situations, such as loans held by trusts or companies, you may need to seek assistance from your bank to access redraw. |
The pros and cons of redraw facilities
Pros
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Reduce loan principal and interest
Any extra repayments are deducted from the loan principal and interest is calculated on the new, lower balance.
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Retain access to your extra contributions
Extra repayments, about a certain minimum required balance, are available for withdrawal. This lets you save while retaining access in times of need.
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Encourages extra home loan repayments
The more you make, the more you'll have available to redraw.
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“Save” at a higher rate
Your mortgage interest rate may often be higher than a dedicated savings account, making it more advantageous to make extra loan repayments than to deposit in a savings account.
Cons
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Requires discipline
If you use your redraw facility, you won't pay your loan off as quickly as possible. You're borrowing again.
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Account limits and delays
Withdrawals from a redraw facility are often subject to conditions, such as minimum redraw amounts or delays of up to one to two working days for larger sums.
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Fees for withdrawals
Some lenders charge a fee every time you use the redraw facility, which can deter frequent usage.
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Less suitable for investors
Redraw facilities may not offer the same tax advantages as offset accounts, making them less appealing for those with investment loans.
What is an offset account?
An offset account is a separate bank account linked to your home loan. The balance in this account is used to offset your loan balance, which reduces the amount of interest charged. Unlike a redraw facility, funds in an offset account remain fully accessible at all times, making it a more flexible option for borrowers.
Offset accounts are particularly popular with those who want to combine everyday banking with interest savings. They provide an excellent solution for those who want liquidity while still reducing their interest payments. They can also be beneficial for investors who wish to maintain maximum flexibility with their funds.
Having a consistent balance in your offset account can save you a significant amount over the life of your loan. The following table shows what you could save on a $500,000 loan repaid monthly over 30 years at 5.95% p.a. interest with different account balances:
| Offset account balance | Total interest paid | Interest saved | Total time saved |
|---|---|---|---|
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$0 |
$573,412
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N/A
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N/A
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$10,000 |
$526,686
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$46,726
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One year, three months
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$25,000 |
$465,503
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$107,909
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Five years, four months
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$50,000 |
$381,666 |
$191,746 |
Three years
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$100,000 |
$259,587 |
$313,825 |
Eight years, nine months |
The pros and cons of offset accounts
Pros
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Reduced mortgage interest
Interest is calculated on your mortgage principal, minus the amount in your offset account, allowing you to save while also retaining full control of your funds.
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Everyday banking convenience
Offset accounts function like a regular transaction account, allowing borrowers to deposit their income, pay bills and access funds whenever needed with no fees.
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Tax benefits for investors
For investment properties, offset accounts offer potential tax advantages since they don’t directly reduce the loan balance, preserving tax-deductible interest.
Cons
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Requires high balance
An offset account will only be effective in reducing your home loan interest if you consistently have a high balance in it. This may not be realistic for your individual financial situation.
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Not all lenders offer 100% offset accounts
Some only offer partial offset accounts. This means that only part of your offset account balance will be used to reduce your home loan balance.
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Impact on repayments
Using redraw increases your loan balance, which in turn, increases the interest portion of your repayments. If your goal is to pay off your loan faster, using redraw might not be the most effective strategy.
Does either option reduce your monthly repayments?
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?
When deciding between a redraw facility and an offset account, it’s essential to evaluate your financial habits, goals and loan structure.
- If you’re a disciplined saver who rarely needs access to extra funds, a redraw facility may be the better choice. It allows you to make extra repayments and save on interest without the temptation of easy withdrawals.
- If you need flexibility and access to your funds for emergencies or daily expenses, an offset account may suit you better. It provides the dual benefit of reducing interest while functioning as an everyday bank account.
Example scenarios:
Scenario 1: Jenny and Bob, the Savvy Savers
Jenny and Bob recently purchased their first home with a $620,000 mortgage at a 6.00% p.a. interest rate. They've opted for a 25-year loan term with fortnightly repayments of $1,841.
To accelerate their loan repayment, they've set up a redraw facility. After two years of making regular repayments, they start making extra repayments of $300 per fortnight, bringing their total fortnightly payment to $2,141. Let’s see how much difference this makes overall:
| Loan amount | Interest rate | Loan period | Fortnightly repayment | Extra fortnightly repayment (after 2 years) | Redraw amount after 5 years | Saving after 5 years | Overall interest saving | Time saved (approx.) |
|---|---|---|---|---|---|---|---|---|
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$620,000
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6.00% p.a.
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25 years
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$1,841
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$300
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$23,400
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$25,606
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$143,696
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Five years, ten months
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$620,000
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6.00% p.a.
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25 years
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$1,841
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$0
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$0
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N/A
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N/A
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N/A
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Scenario 2: Shae, the Savvy Investor
Shae, an experienced investor, has a $500,000, 25-year mortgage on an investment property at a 6.75% p.a. interest rate with fortnightly repayments of $1,594.
By first paying the $1,200 in fortnightly rental income towards her repayment, this leaves a shortfall of $394 to be paid. Shae chooses to put the rest of her $20,000 in savings into the offset account, effectively reducing the loan balance and minimising interest payments.
| Loan amount | Interest rate | Loan period | Fortnightly repayment | Extra fortnightly repayment (after 2 years) | Redraw amount after 5 years | Saving after 5 years | Overall interest saving |
|---|---|---|---|---|---|---|---|
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$500,000
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6.00% p.a.
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25 years
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$1,594
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$1,200
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$394
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$20,000
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$79,513
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The benefit of using an offset account instead of a redraw facility is to avoid altering the purpose of the loan by making payments and withdrawals unrelated to the investment property. For instance, if Shae had $20,000 in the loan redraw account and withdrew $15,000 for a holiday, this may be viewed unfavourably by the ATO, as it’s “borrowing” for a non-deductible expense.
By instead using an offset account, the same money would be unattached to the investment property loan, though still work to reduce the principal upon which interest is calculated. This strategy allows her to reduce interest on the loan, while still claiming a tax deduction for interest accumulated.
Additionally, Shae can access the funds in her offset account whenever needed, providing her with flexibility to cover unexpected expenses or reinvest in her property portfolio. By effectively utilising her offset account, Shae optimises her investment strategy, builds long-term wealth and minimises her tax liability.
