What’s the difference between redraw facilities and offset accounts?

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on January 19, 2022
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What’s the difference between redraw facilities and offset accounts?

If you're looking at diving into the property market, it’s important to understand the differences between two key home loan features that can both prove beneficial for you and your back pocket over your mortgage journey.

From interest expenses and fees to mortgage repayments themselves, it can be easy to feel behind the eight ball when living with a mortgage. However, there are some things that can help put the ball back in your court, such as redraw facilities and offset accounts. Either of these features, when utilised correctly, could give you the leg-up you need to get on top of your mortgage and make big interest savings with minimal effort.

But is an offset account better than a redraw facility? Or is it the other way round?

With both serving similar interest saving purposes, let’s first unpack the similarities and differences between these two home loan features.

In this article, we’ll take a look at:


Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Lender

Variable
More details
UNLIMITED REDRAWSSPECIAL OFFER
  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
UNLIMITED REDRAWSSPECIAL OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
Variable
More details
AN EASY DIGITAL APPLICATION
  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
AN EASY DIGITAL APPLICATION

Neat Variable Home Loan (Principal and Interest) (LVR < 60%)

  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
Variable
More details
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES
  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
Variable
More details
NSW/VIC/SA METRO & INNER REGIONAL AREAS$5000 CASHBACK. T&Cs APPLY.
  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
NSW/VIC/SA METRO & INNER REGIONAL AREAS$5000 CASHBACK. T&Cs APPLY.

Variable Home Loan (Principal and Interest)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of May 22, 2022. View disclaimer.


Similarities between redraw facilities and offset accounts

Reduce the interest payable on your loan

An offset account is essentially a transaction account linked to your home loan used to ‘offset’ the total interest-accruing balance. Similarly, a redraw facility is an account that pools any additional repayments you make on your home loan. Both are designed to help reduce the interest charged on top of your home loan. 

Pay off your mortgage faster

Your offset account balance reduces the amount of your mortgage that’s charged interest. Say your current home loan debt is $500,000 and your offset account is $20,000. In this scenario, interest will only charged on a balance of $480,000. Your repayments will remain the same, but a bigger share of the repayment will go towards paying off the principal rather than interest so you’re effectively paying off the loan at a faster rate.

A redraw facility acts in similar manner. Let’s say your minimum monthly repayment on your home loan is $1,000. You decide to pay an extra $100 a month – adding up to $1,200 in one year. Your home loan debt will be $1,200 lower, but these extra funds should still be available for you to access through a redraw facility if and when you need them.

Differences between redraw facilities and offset accounts

Flexibility

As mentioned earlier, an offset account is a separate transaction account. For you being the borrower, this provides flexibility as it means you can have your employer deposit your salary into the account, and you can transfer money in from other accounts. If you choose too, you can use your offset account for everyday spending like groceries and bills by using a debit card.

In contrast, a redraw facility is not a separate account, but a feature attached to your home loan. A redraw facility may not be as flexible as an offset account as it is essentially the lender’s money and the lender reserves the right to refuse a withdrawal. For example, you may not have the option to redraw money from an ATM or transact using a debit card. Some lenders may also set minimum redraw amounts and charge fees for redrawing.

Tax implications

There may be different tax implications when it comes to using your redraw facilities and offset account if you decide to rent out your home in the future. 

If you decide to rent out your home as an investment property, the interest charged on the loan may be tax deductible. However, you may not be able to claim any portion of the loan you have redrawn from your redraw facility for non-investment purposes. These include the likes of a holiday or a private car. On the other hand, withdrawing amounts from your offset account won’t affect the tax deductibility of interest charged on your loan.

Can they work together?

While redraw facilities are generally only available on variable rate home loans, many Australians use both offset accounts and redraw facilities. As an example, you may consider making an extra repayment into your home loan each month. In addition, you might choose to use an offset account as your transaction account where your salary is deposited.

Both your offset account and redraw facility may help to reduce the amount of interest you pay on your home loan and pay off your home loan sooner. Bear in mind some lenders will charge break fees if you repay your loan early or violate your loan terms in some way. Offset accounts and redraw facilities can make it easier to pay off your mortgage sooner, therefore it’s important to be aware of any consequences in doing so.

Savings.com.au’s two cents

Similarities and differences aside, which should you choose?

Both offset accounts and redraw facilities can add flexibility to your home loan, making it easier for you to manage your repayments, pay off your loan sooner and ultimately save on interest expenses. However, you'll only see the benefits of these features if you're depositing a reasonable amount of money for a considerable amount of time. 

If you aren’t someone who makes many extra home loan repayments, it might not be much benefit to open a redraw facility. Yet on the other hand if you don’t like to keep large amounts of money in a savings account, an offset account may not be the best option for you.

It ultimately comes down to the feature that best suits your individual spending and saving habits. What works for one person may not work for you, therefore it’s wise to consult an accountant, lending specialist or financial professional on the best option to suit your home loan and current financial position.


Image by Vincent Van Zalinge via Unsplash

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

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Jacob Cocciolone joined the Savings team in 2021 as a Finance Journalist. Driven by a passion for keeping Australians up to date with the latest financial news and trends, his areas of interest include financial technology, investing, property and motoring.

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