Understanding Offset Accounts vs. Redraw Facilities

If you’ve ever looked into home loans, you’ve probably come across two commonly mentioned features: offset accounts and redraw facilities. While both can help you save money on interest and pay off your home loan faster, they work in slightly different ways, and understanding the difference could help you choose the loan that suits your lifestyle and goals.

So what exactly are offset accounts and redraw facilities, and which one is right for you?

Let’s break it down in simple terms.

What Is an Offset Account?

An offset account is a transaction account that’s linked to your home loan. The balance in that account doesn’t earn interest, instead, it offsets the interest charged on your mortgage.

For example, if you have a home loan of $500,000 and $20,000 sitting in your offset account, your lender will only charge interest on $480,000. This can lead to significant interest savings over time, and help you pay down your loan faster without changing your repayment amount.

Because it’s a transaction account, you can deposit your salary, make everyday purchases, and transfer money in and out as you would with a regular bank account. It’s a flexible option that suits borrowers who maintain some savings or prefer to keep cash flow accessible.

What Is a Redraw Facility?

A redraw facility also helps reduce the interest you pay, but it works a little differently. When you make extra repayments on your home loan (above your minimum required amount) you can access that extra money later through a redraw.

This is handy if you want to get ahead on your loan but still have access to those funds in the future, such as for a holiday, home improvements, or an emergency.

Unlike an offset account, a redraw facility isn’t a separate account. It’s built into the loan itself, and there may be restrictions or fees around how and when you can access your funds. Some lenders have limits on the number of redraws you can make or require a minimum redraw amount.

Key Differences: Offset vs. Redraw

While both features can help reduce interest and shorten your loan term, there are a few key differences:

• Access: Offset accounts give you instant access to your money through everyday banking. Redraw facilities may have delays or limits on withdrawals.

• Flexibility: Offset accounts function like standard bank accounts, while redraw funds are tied to your loan.

• Loan Types: Offset accounts are usually only available with variable-rate loans, though a few lenders offer them on fixed loans. Redraw facilities are more widely available.

• Tax Implications: For investors, using an offset account can be more beneficial for maintaining loan deductibility, whereas redrawing funds may complicate tax deductions.

Which Option Is Right for You?

It depends on how you manage your money. If you like flexibility and want full control of your savings without locking funds away, an offset account may be the better fit. It’s ideal for people who like to use their income to reduce loan interest while still having quick access to their money.

If you’re a disciplined saver and don’t need regular access to extra funds, a redraw facility could suit you just fine and still help you chip away at your mortgage faster.

Some home loans offer both features, which can give you the best of both worlds. It’s worth checking with your lender, or better yet, speaking with a mortgage broker, to understand what’s available and how to structure your loan for maximum benefit.

Final Thoughts

Both offset accounts and redraw facilities are powerful tools to help you pay less interest and pay off your loan sooner. The right one for you depends on how hands-on you want to be with your money, and how much flexibility you need day to day.

Still unsure which one suits your situation? Let’s talk through your goals, compare lenders, and find the right loan structure for your lifestyle.

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