What is the difference between an offset account and redraw facility?

An offset account is a transaction account that is linked to your home loan. The balance of this account is offset daily against the total loan amount to reduce the principal that you pay interest on. For example, if you have a mortgage of $500,000 but hold an offset account balance of $50,000, you’ll only pay interest on $450,000. Lower interest charges means each mortgage repayment can cover a little more the principal, meaning an offset account could potentially help you pay off your home loan faster and save thousands of dollars in interest charges.

Most lenders will let you use an offset account as an everyday bank account, including letting you withdraw funds from an ATM using a bank card or EFTPOS terminal. For comparison, if you make extra repayments onto your home loan, or use a term deposit, it may not be easy to withdraw your money and you may face additional fees.

It’s important to note that an offset account won’t lower your fixed or variable interest rate. Additionally, lenders typically only offer an offset facility attached to a variable loan, though some lenders do offer fixed rate home loans with a full or partial offset option.

While an offset account can potentially save you thousands in interest charges over the life of your loan, you may also incur additional fees and there may be fewer loan products available with this feature. Before applying for a home loan, it’s sensible to shop around and calculate the savings versus any additional account keeping fees to get a better idea of an offset account’s value to you.

A redraw facility attached to your home loan allows you to take back any additional repayments that you make on your loan. These extra repayments mean you will be charged less interest, as you’ll be reducing the principal owing on your loan. Much like with an offset account, this could potentially save you thousands of dollars over the life of the loan as you could pay off your mortgage sooner.

Any lump sum payments you make on top of your required home loan repayments are added to your home loan redraw. For example, if you pay an extra $200 a month on top of your minimum monthly repayment covering principal and interest, you’ll have $2400 sitting in your redraw facility by the end of the year. Then, you can take back or “redraw” this money down the track.

However, this feature is different to an offset account in that some lenders may limit the amount you can redraw. There are also different tax implications between an offset account and a redraw facility, especially if you’re an investor, so it’s best to compare your options to evaluate which suits your financial goals.

If you find yourself in need of emergency funds, the benefits offered by a redraw facility may outweigh those of other quick cash options, such as relatively high-interest personal loans. Also, unlike a personal loan or a credit card, you don’t have to pay any interest on money you redraw as it’s your money: you’ve just used it to pay off your home loan. Just keep in mind that money you redraw will no longer affect your home loan interest.

A redraw facility does not come with the same flexibilities as an offset account. You can’t use a redraw facility as a transaction account, so you can’t have income, like your salary, automatically deposited into a redraw facility. You may be limited by minimum and maximum redraw amounts and there could be fees attached. It could also take time to access your money in a redraw facility, while an offset account gives you immediate access to your funds.

Having money in redraw or an offset account typically does not reduce your monthly repayments. Instead, it lowers the interest you are charged each month, so each repayment covers a little more of your mortgage principal. This enables you to pay down your loan faster and potentially save thousands of dollars over the life of the loan.

The interest savings are the same whether your money is parked in a redraw facility or an offset account. But you’ll need to consider the interest rate being charged, as well as the fees and flexibility to access your money to work out if a redraw facility or offset account could offer more value to you.