Many home loans these days come with an offset account, a redraw facility or both. These features can offer borrowers flexibility and savings if used carefully. You’ve probably heard about redraw and offset accounts before, but do you know what the difference between the two is?
What is an offset account?
An offset account is a transaction account from the same financial institution which is linked to a customer’s home loan but otherwise generally functions as a regular everyday account. This means you can typically deposit money into an offset account, withdraw money from it and buy things using a debit card linked to it.
The primary advantage of an offset account over a standard transaction account lies in its daily ‘offsetting’ feature against your home loan balance. With this setup, the money deposited into the offset account reduces the outstanding balance of your home loan, effectively lowering the amount on which interest is calculated. This stands in contrast to traditional accounts where interest is charged against the entire outstanding balance of the home loan.
While many offset accounts consider the full balance when calculating interest repayments (often termed as ‘100%’ or ‘full’ offset accounts), others offer only partial offsetting, where only a portion of the offset account balance is factored in.
For instance, if you owe $300,000 on your home loan and have $50,000 in a full offset account, interest would be charged on the reduced balance of $250,000. With a 50% offset account, interest would instead be calculated on $275,000.
While the majority of lenders provide 100% offset accounts, some may levy fees, so it’s advisable to verify these specifics with your provider. Offset accounts are typically associated with variable rate home loans, although they can also be linked to fixed-rate home loans.
What is a redraw facility?
A redraw facility is a feature which lets you withdraw any additional repayments you’ve already made towards your home loan. It differs from an offset account in that it is not a separate bank account at all, but a feature which sits inside your home loan.
With a redraw facility, you usually cannot access funds allocated as minimum repayments; instead, you’re typically limited to withdrawing amounts beyond your minimum obligations.
It’s important to highlight that unlike an offset account, which often provides immediate access to your funds, a redraw facility may not offer instant withdrawal capabilities. Processing a redraw request may take one or two business days, and your home loan provider might impose fees on these transactions. Additionally, some lenders may stipulate minimum redraw amounts or restrict the frequency of withdrawals.
Offset account vs redraw facility – which is better?
While many Australian homeowners could benefit from either or both of these popular loan features, it’s important to note that either a redraw facility or a mortgage offset account may be better for you depending on your personal circumstances and preferences.
- Reducing the interest you pay while keeping regular access to your cash:
A mortgage offset account reduces the home loan interest you pay based on the balance of the account, but leaves you with day-to-day access to the funds in the account. A mortgage offset account may therefore be well-suited to homeowners who want to minimise the interest owing on their repayments, without necessarily paying extra off their principal. But this also means a borrower with an offset account who doesn’t make any extra repayments may take longer to repay their home loan overall, than someone making regular extra repayments into a redraw facility.
- Paying off the loan faster:
A redraw facility lets you make extra repayments directly to your home loan, reducing the total balance and potentially helping pay it off faster. However, it’s not as flexible as an offset account in terms of access time and fees. If you anticipate frequent withdrawals, an offset account might be better. Both features can be beneficial, but remember to also consider factors like interest rates, comparison rates, and fees. Additional rebates or costs, such as First Home Owners Grants or lenders mortgage insurance, should also be taken into account, especially for first-time homebuyers or those with low deposits.
How much could a borrower save by using an offset account or redraw facility?
Regardless of the strategy that you decide is right for you, any extra money that you can pay off on your mortgage or keep in an offset account could save you a significant amount in interest in the long run. But remember, features such as an offset account or redraw facility can also add costs to your home loan in the form of additional fees or a higher interest rate. While they perform a similar function in reducing the interest you pay on your home loan, there are also a few key differences that could be worth considering, including possible tax implications.
. You may also want to consider seeking professional financial advice to help you reach a decision.
What are the similarities between an offset account and a redraw facility?
Both offset accounts and redraw facilities offer the following:
- They can help reduce the amount of interest you pay on your home loan
- They can help you pay off your loan earlier
- They are generally available on most standard variable loans.
What are the differences between an offset account and a redraw facility?
An offset account works like a regular savings account and uses a debit card that is attached to your home loan. Whilst linked to your home loan it exists separately, so it provides flexibility to access your money instantly and without restriction.
A redraw facility isn’t a transaction account, it’s a facility linked to your home loan. It allows you to make extra repayments on your home loan account and take them out again. It may not be as flexible as an offset account as you may incur fees in doing so, or it may take more time to access money that has already been paid to the bank as part of your home loan.
How can we help? if you have any questions or would like further information, please feel free to give our office on 08 9221 5522 or via email – info@camdenprofessionals.com.au or arrange a time for a meeting so we can discuss your requirements in more detail.
General Advice Warning
The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.
Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.
Although every effort has been made to verify the accuracy of the information contained on this page and on this website, Camden Professionals, its officers, representatives, employees, and agents disclaim all liability [except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this website or any loss or damage suffered by any person directly or indirectly through relying on this information.
How can we help? if you have any questions or would like further information, please feel free to give our office on 08 9221 5522 or via email – info@camdenprofessionals.com.au or arrange a time for a meeting so we can discuss your requirements in more detail.
General Advice Warning
The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.
Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.
Although every effort has been made to verify the accuracy of the information contained on this page and on this website, Camden Professionals, its officers, representatives, employees, and agents disclaim all liability [except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this website or any loss or damage suffered by any person directly or indirectly through relying on this information.
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