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Redraw vs offset: what is better for you?

An offset account or redraw facility are common home loan features many lenders offer. These features give you the functionality to store additional repayments/savings against your loan while reducing the interest charged on your home loan. The funds remain accessible to you should you want to draw on them in at any point in the future.

Both these features have similarities but do operate in a slightly different way. It is important to understand the minor differences in order to decide which option is more suited to you.

Offset Accounts

An offset account is a separate savings or transactional account that is linked to your home loan. The easiest way to think of this account is like a ‘home base’ for your cash flow. Any incomes (Salary, Rental, Dividends etc) can arrive into the account and expenditure items can come straight out of the same account.

The key benefit of doing this is to save interest on your mortgage. The bank will calculate your interest repayments based on your Loan Balance minus your Offset Savings amount.

Example;

If you have a home loan of $430,000 and you have savings in a linked offset account of $70,000 then you will pay interest for the month on $350,000 ($430,000 minus $70,000).

On a 4.1 percent home loan, your $70,000 has saved you $273.33 in interest for the month and $3280 for the year.

Pros:

  • Having an offset account can save money in interest repayments off your home loan
  • An offset account works in the same way as a day-to-day transactional account does with money easily accessed at any time whilst simultaneously reducing your interest payments on your mortgage
  • If you have large sums of money in a savings account the interest earned would be taxable. Alternatively, placing these funds in an offset account is not earning money (rather saving interest charged) so therefore there is no tax payable on these funds

Cons:

  • Having an offset account tied to your home loan typically comes with additional costs in one of the two below forms:
    • Slightly higher interest rate
    • Higher annual fee (typically around $350pa)

 

Redraw Accounts 

A redraw facility is not a separate account but instead a feature of your loan account. This facility allows you to draw back funds that you have paid into your loan account ahead of your standard monthly loan repayments.

Example:

If your monthly loan repayments are $2300.00 but instead you pay $3000 (an extra $700), then at the end of 12 months you will have $8400.00 sitting in your redraw account. This amount can be redrawn to pay for whatever you like. Whilst the funds sit in your home loan account, you are reducing interest charged month to month.

Pros:

  • Allows you to utilise any extra funds for required purchases
  • Since the redraw account balance cannot be typically seen when withdrawing money from an ATM, you are effectively ‘hiding’ savings from yourself which may reduce temptation to spend
  • Reduces interest repayments through voluntary contributions

Cons:

  • Less flexible than an offset account as you can’t withdraw funds instantly from an ATM
  • Some banks may charge you a fee for accessing and redrawing the funds within the redraw facility
  • Some lenders may also set a minimum redraw amount thus forcing you to take out $500 or more at any one time

Choosing the right feature and understanding its potential is important to ensuring you are efficiently saving money and utilising your loan structure in the right way. By speaking to a Mortgage Broker you will be able to gain information regarding your home loan options and unlock the potential for you to reduce your mortgage faster.

 

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