Offset vs redraw

Offset vs. redraw

If you’ve ever researched or taken out a home loan, you will have heard about offset accounts and redraw facilities. But what exactly are they, how do they work, and will they save you any money?

Disclaimer: The information contained in this article is of a general nature only and should not be taken as financial or legal advice on any of the topics discussed. Always consult a financial adviser before making any investment decisions.

At first glance, offset and redraw may seem much the same. Both provide a way for you to get ahead on your mortgage and have some level of flexibility to access the money you’ve deposited there. But once you scratch the surface, the individual differences and benefits are much more apparent. This is likely where most people will get stuck, not knowing which option to choose.

Neither is better than the other. The best choice for you will boil down to how you manage your finances, how you want to use the money that is available and – potentially – the tax considerations for each. Depending on your lender, you may even be able to use both together.

Here’s a look at the differences between both.

Offset

An offset facility is an account that is attached to your home loan. It behaves exactly the same way as a normal transaction account, but with the bonus of reducing the amount of home loan interest you have to pay each month.

You can transfer money in and out of an offset facility and pay bills and everyday expenses. Offsets typically come with a debit card, so you can access your money at ATMs and shop at retailers as you normally would. The only difference is that an offset account doesn’t earn interest, instead using any potential earnings to automatically reduce the interest you pay on your home loan. 

Example

• If you have a $500,000 mortgage, with $20,000 in an offset account, you’re only paying interest on $480,000.

To sum up an offset facility in a single sentence might look something like:

“An offset facility gives me the flexibility I need for bill paying and daily spending, while reducing the amount of interest I pay on my home loan by an amount equal to the offset balance.”

If you budget wisely, you can use this to your advantage. By depositing your salary into the offset and using your credit card to make purchases the offset balance will stay higher longer, reducing the interest on your mortgage.

Only consider this option if you’re confident that you can pay the credit card balance in full every month. Otherwise, you’ll get charged interest on the balance which may counteract any savings you’ve gained by using the offset.

Redraw

While you may not have the same flexibility as an offset account, a redraw can still be a valuable tool to help you get ahead on your home loan. Unlike offsets, a redraw facility isn’t a separate account attached to your mortgage.

With a redraw, if your monthly loan repayment is $1,500, but you pay $2,000 each month, the $500 over and above your required repayment is available for you to withdraw from your loan at a later date. Because these extra repayments go towards principal and interest, any amount paid over your minimum repayment chips away at the life of your loan, and a shorter loan means less interest paid over its lifetime.

Because there is no account associated with a redraw facility, accessing your extra repayments can take more time. While you can transfer out of a redraw, you might have to apply to your lender and there may be minimum amounts you have to withdraw each time. Your lender may also charge a fee for this.

Redraws can be a great way to put money aside for a big expense, such as completing renovations or paying off other debt.

Using the previous example of a $350,000 mortgage over 30 years, paying an extra $500 per month from the beginning of your loan could save you $82,971 and over 10 years on the life of your loan^.

Be aware that any withdrawals from the redraw facility will affect the total savings, but you can see how much of a difference the extra repayments can make.

What should I look out for?

Full or partial offset

You sometimes have the option of a full or partial offset. With a partial offset, only a portion of your interest will benefit from the balance of your offset. This usually happens when you split your home loan between fixed rate and variable rate.

Splitting your loan

In general, a 100% offset is only available on variable rate loans. If any portion of your loan is on a fixed rate, the balance in your offset won’t affect this fixed portion. If you’re thinking about fixing a portion of your loan, this is something you will need to consider. Check with the lender to see how splitting your loan could affect your offset, and ask if they offer offset on fixed rate loans as well as variable.

Tax deductions

There may be tax implications for withdrawing money from your redraw on an investment loan. You may not be able to claim any portion of your loan that you redraw for a non-investment purpose, such a buying a car or going on a holiday. On the other hand, withdrawals from an offset account won’t affect interest deductibility.

Are there any extra fees?

There can be. You may be charged a fee when you redraw money, or there may be an ongoing fee for the offset account. You could also end up paying a higher interest rate if your loan has one of these attached, even if you don’t use it. If either an offset or redraw are important to you, look for lenders and home loans that offer no-fee or low-fee options.

Offset and redraw together

Some lenders offer both an offset and redraw to help make the most of your savings potential.

How much can I save?

Offset and redraw both have the potential to save you thousands of dollars. How much you can save will depend on all of the factors above, so it’s worth seeking financial advice to help you decide which way to go.

Thinking about reviewing your home loan?

Before making any decisions on the type of home loan situation that is right for you, we’d recommend that you book in a free home loan health check today! Our home loan specialists can help you weigh up the pros and cons. No strings attached. No obligations. 

At Firefighters Mutual Bank, we know essential workers are vital to our future, that’s why we’re looking out for theirs. Take a look at our home loans, with great discounts and benefits for you.