Redraw vs Offset Account?


Offset accounts and redraw facilities are two home loan features that are widely offered by home loan providers and have proved very popular with home buyers with well over 50% of new mortgages, in the last 10 years, featuring either a redraw facility or off set account. Both these features are designed to allow you to use any extra income or savings to reduce the balance of your home loan, thereby reducing your interest repayments. There are similarities between the two, but they operate in different ways.

 

  1. Redraw Facility

Home loans with a redraw facility allow you to redraw money out of your home loan up to the value of any extra payments you have made, beyond your regular repayment. So for example if your minimum home loan repayments for the year are $30,000 and you repay $40,000, you will have made extra repayments equating to $10,000, which is the value you have available to redraw from your home loan.

Any additional repayments made through your redraw facility are made directly into your home loan and so reduce the principle balance on your home loan which in turn will reduce the amount of interest you are charged. By paying your extra repayments directly into the home loan, a redraw facility allows you to reduce the principle of your loan, rather than simply reducing interest paid in the short-term. So for example if your home loan is $500,000 and you have made extra repayments of $40,000, you would have reduced the balance on your home loan down to $460,000, which results in interest only being charged on the reduced loan balance.

It is important to remember that the reduced interest charges delivered by your extra payments will disappear when you redraw the money from your home loan as your loan balance will rise by the amount you redraw. Accessing the money you have within your redraw facility will generally take a little time and any redraws may attract a service fee.

 

  1. Offset Account

An offset account is basically an interest bearing account which is linked to you home loan with any money deposited, and held in your offset account is “offset” against the balance of your home loan account for interest calculation purposes. So for example if your home loan balance is $200,000 and you make a deposit of $20,000 into your offset account for the month, interest for the month is calculated on $180,000 instead of $200,000.

Offset accounts generally earn interest on your savings at rates similar to a standard savings account and work much the same way as a transaction account where you have easy access to your money via EFTPOS, ATM’s and in some cases via Credit Card.

The interest earned on the money in your offset account is automatically deposited into you home loan account, usually on a daily basis, which reduces the balance of your loan and in turn reduces your interest repayments. As any interest earned is never withdrawn from the account it is not liable for tax, which would be the case with a standard savings account.

Looking at an example:

Standard Home Loan with no Offset Account

  • Home Loan Balance: $300,000
  • Home Loan Interest rate: 5%
  • Interest Payable per year: $15,000

 

Home Loan with an Offset account

  • Home Loan Balance: $300,000
  • Offset account Balance: $40,000
  • Loan Balance less the offset account Balance: $260,000 ($300,00 - $40,000)
  • Home Loan Interest rate: 5%
  • Interest Payable per year: $13,000

So the net impact of holding $40,000 in the offset account is that you will save $2,000 in interest charges in that year.

The most popular type of offset accounts are 100% offset accounts, these accounts offer an interest rate on your savings which is equal to the interest rate you are paying on your home loan..

 

Example of how an off set account can deliver interest savings.

Off Set Account Interest savings calculation

 

 

 

 

 

 

 

Redraw facility Versus a Offset Account

Both these home loan features are designed to deliver savings in interest on your home loan, though they take different approaches the pros and cons of which are considered below:

 

Redraw Facility

Offset Account

Access to Money

Unflexible Access to Funds: Limit on the number of redraws made per year and a minimum value on redraws

Flexible Access to funds: ATM, EFTPOS and potentially Credit Card

Fees

Fees maybe charged for each withdrawal

No fees generally charged to make withdrawals.

Home Loan Interest rate

Not impacted by inclusion of a redraw facility

Tend to be slightly higher than standard Home Loans

Who do they work for?

Most relevant to you if you do not have much savings and are unlikely to make any redraws on your account

Most relevant where you have significant savings and a large home loan. Depositing your monthly salary into an offset account is a popular way of maximizing the savings from this option

 

Many home loan providers now offer home loans, which include both an offset account and a redraw facility, delivering complete flexibility. To maximize the savings from these home loans deposit your everyday spending money in your offset account, and keep any money you do not need access to in the short to medium term into your redraw facility.