The primary difference between an offset account and a redraw facility is that an offset account is intended to operate as a transaction account that can be accessed whenever you need it, while a redraw facility is more like an “emergency fund” that you can draw on if necessary but isn’t intended to be used for everyday expenses.
Let’s define the characteristics and further explore the differences between these two home loan features.
What is an offset account?
An offset account functions as a transaction account that is linked to your home loan. The balance of this account is offset daily against the total loan amount and reduces the principal that you pay interest on.
An offset account is essentially an everyday bank account and most lenders will allow you to use it as such, including the ability to withdraw funds from an ATM using a bank card or EFTPOS terminal. Comparatively, if you make extra repayments against your home loan, or use a term deposit, the withdrawals you have access to may be limited and you may face additional fees.
By using an offset account it’s possible to reduce the length of your loan and the total amount of interest paid, potentially by thousands of dollars. For example, if you have a mortgage of $500,000 but hold an offset account with $50,000, you’ll only pay interest on $450,000.
It’s important to note that utilising 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, however some lenders do offer fixed rate home loans with an offset option or allow you to use a partial offset.
While an offset account can save you thousands in interest repayments over the life of your loan, you may also incur additional fees and there may be fewer loan products available with this feature, so it’s sensible to shop around and calculate the savings versus any additional account keeping fees.
What is a redraw facility?
A redraw facility attached to your home loan allows you to borrow back additional repayments that you have already made on your loan. This can be a beneficial feature because, by paying down the principal with additional repayments, you will be charged less interest.
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. Any lump sum payments made in addition to your required home loan repayments are also added to your home loan redraw. Then, you can take back or “redraw” this money down the track.
Lenders take into account the money in your redraw facility and calculate interest on the principal amount minus the money in your redraw, potentially saving you thousands of dollars over the life of the loan.
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, 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 high-interest personal loans. In addition, you don’t have to pay any interest on the amount that you withdraw as it’s your money: you’ve just used it to pay off your home loan.
A redraw facility does not come with the same flexibilities as an offset account. You can’t have income, like your salary, automatically deposited. You can’t use a redraw facility as a transaction account. 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. An offset account gives you immediate access to your funds.
Offset vs redraw: potential savings explained
Having money in redraw or an offset account does not reduce your monthly repayments, it lowers the amount of interest you pay each month, enabling 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 the money is parked in a redraw facility or an offset account.