Redraw facility vs offset account

Looking for a home loan and wondering whether you should get a redraw facility or offset account? Find out the facts before you decide.

Redraw facility vs offset account explained

Redraw vs offset, it’s an important comparison. These optional features are available on most home loan products in Australia. However, many borrowers don’t know whether to get a redraw facility, an offset account, both, or neither.

What is a redraw facility?

A redraw facility essentially allows you to borrow the money that you have already repaid. This feature is usually used by Australians that are faced with unexpected circumstances or need the money to perform renovations on the house. This feature tends to come with variable rates that need to be considered before opting for it. It can also allow you to be flexible in terms of how you repay the loan.

When you take out a home loan, you will have regular repayments you need to make. If you repay more than you need to, then that amount is available to ‘redraw’ at any time.

There are two main ways you can make extra home loan repayments.

  • By paying an additional one-off lump sum. For example, depositing a tax refund into your home loan account in addition to making your regular repayments. This amount could be redrawn in the future if necessary. Your regular repayments won’t reduce if you make any additional repayments. Instead, they will stay the same and any of your additional repayments will remain available to you to redraw.
 
  • By converting your monthly repayment amount into fortnightly repayments instead. You can do this by dividing your monthly repayment by two. This enables you to make extra repayments without putting too much strain on your budget.
 

The table below shows you the extra repayment amount you can make each year by doing this.

Monthly repayment amount Fortnightly repayment amount Total extra repayment amount per year
$2,200
$1,100
$2,200

You make an extra monthly repayment amount each year because there are slightly more than two fortnights in each month.  This amount is available to redraw in the future if necessary. For example, after 10 years, you would have $22,000 available to withdraw.

What is an offset account?

An offset account is a savings account or transaction account that can be linked to your home loan account. This is a handy feature that can come in handy for Australians that are looking for ways to reduce their mortgage by using the accounts balance to offset your home loan balance. What this means is that your lender will charge you less interest since they will not be charging you interest on the full balance of your loan.

Suppose you have a home loan balance of $480,000 and you have an offset account balance of $20,000. You would be charged home loan interest on $460,000 (i.e. $480,000 less $20,000), not on the $480,000 that you owe. The table below shows how much interest you could save in this situation over a year at different interest rates.

Interest rate Annual interest payable on $480,000 Annual interest payable on $460,000 Annual interest saving
2.5%
$6,525
$6,253
$272
3.5%
$9,149
$8,767
$382
4.5%
$11,780
$11,289
$491

Home loan interest rates are higher than deposit account rates. This means you will save more interest using an offset account than you would earn in an everyday bank account.

Redraw vs offset – similarities and differences

  • They both allow you to save interest

We’ve already explained how offset accounts can save you interest. Redraw facilities can also save you interest when you make additional repayments. These repayments reduce the amount you owe and therefore how much interest you’re charged until you redraw the funds.

  • They both allow you to pay off your mortgage faster.

Having a redraw facility encourages you to make extra home loan repayments which will reduce the amount you owe. Even if you do redraw, you may not need to redraw the entire amount you have available. If you don’t you’ll pay off your home sooner.

Offset accounts reduce your home loan interest. This means that more of your regular repayments go towards reducing the amount you owe.

How they are different

  • Offset accounts can be used for daily expenses. It is an account that’s separate from your mortgage. You can’t usually use redraw facilities for everyday expenses.
  • Redraw facilities usually have less flexibility than offset accounts. For example, there may be minimum redraw amounts, which typically won’t be the case for withdrawals from an offset account . You may also be unable to redraw from an ATM like you can when you withdraw from an offset account.

Redraw vs offset – which optional home loan feature is best?

There is no simple answer to this question. One may be better than the other depending on your individual financial situation and future needs.

Below are examples of situations when redraw accounts may be more suitable than an offset account.

  • You will rarely have significant funds in your offset account. You won’t save much interest unless you do and it may end up costing you more in fees.
  • You are likely to need home renovations in the future and you can make fortnightly repayments to get ahead. If you do, you can redraw those funds in the future.
 

Situations where you may be better off with an offset account than a redraw facility include the following.

  • You will regularly have significant funds in your offset account. You can achieve this if you deposit your salary into your offset account and then use the interest-free period on a credit card for your daily expenses. This will leave more money in your offset account for longer, reducing your home loan interest by more. However, it’s important that you fully pay your credit card balance within the interest-free period.
  • You are unlikely to need to redraw funds from your home loan in the future.

Should you have both a redraw facility and an offset account?

Again, there is no easy answer to this question. It depends on your individual financial situation and future needs. Both features can benefit you if you use them effectively. You can do that if you ensure the following.

  • Your offset account should regularly have a significant balance.
  • You make extra home loan repayments so that you will have a redraw balance available.
 

However, it’s important to understand that you may be charged fees to have access to either of these optional features. If you are, the benefits need to outweigh the cost. There is no point paying for a redraw facility or an offset account (or both) unless you use them effectively.

Some lenders may not charge fees for either or both of these features. You should always ask before you make a decision and compare home loan products and features from different lenders. You may (or may not) be able to negotiate to have redraw facility and/or offset account fees waived.  

Are offset account and redraw facility fees included in home loan comparison rates?

No. The comparison rate includes the cost of loan interest plus most lender fees and charges. However, any fees for offset accounts and redraw facilities are not included in the comparison rate. That’s because they are optional home loan features.

You should always find out the cost of an offset account or redraw facility before you include it as a home loan feature. That way, you can work out if the cost outweighs the potential benefits. If it does, you’re better off not including it.

Different lenders will have different fees. Some may not charge a fee at all. However, if they don’t make sure they don’t compensate by charging a higher interest rate. Otherwise, you could end up paying more on the long run, and you still won’t gain any benefits.

The pros and cons of redraw vs offset facilities

Both optional home loan features have their potential advantages and disadvantages

Redraw facility pros and cons

Pros

A redraw facility encourages you to make extra home loan repayments. The more you make, the more you’ll have available to redraw.

It can allow you to cope with changing circumstances over time. For example, to renovate your home as your family grows.

It can ensure you have funds available for emergencies (provided you have made your additional repayments).

It can ensure you have funds available for emergencies (provided you have made your additional repayments).

Cons

If you use your redraw facility, you won’t pay your loan off as quickly as possible. You’re borrowing again.

You may be charged a redraw fee.

You won’t be able to use it if you haven’t had the discipline to make any extra repayments. If you can’t and you’re being charged for the facility, you’re paying for nothing.

There can be a delay in getting your funds if you need them quickly.

Offset account pros and cons

Pros

It operates like a high-interest savings account.  That’s because it effectively earns you your home loan rate of interest by the savings it provides.

An offset account encourages you to save. The more you put into it, the more home loan interest you save and the quicker you’ll pay off your home loan.

It provides quick and easy access to your funds.

No withdrawal fees.

It can reduce your tax bill because you don’t earn interest on your offset account funds. Instead, you save interest on your home loan.

Cons

An offset account will only be effective in reducing your home loan interest if you consistently have a high balance in it. This may not be realistic for your individual financial situation.

Not all lenders offer 100% offset accounts. Some only offer partial offset accounts. This means that only part of your offset account balance will be used to reduce your home loan balance. You will save less interest as a result. If you want an offset account, look for a lender that offers a 100% offset account.

Home loans with offset accounts may have slightly higher interest rates. This higher rate can more than offset the benefits of the offset account. It’s important to shop around to find a home loan that has an offset account and a low rate.

What else you need to know about redraw vs offset

Need to know more? Here are answers to other common redraw vs offset questions we get here at Savvy.

Redraw vs offset: which has the higher fees?

This depends on the policy of the lender. It’s important to do your research to find fee-free or low-fee options.

Should you have a redraw facility with an investment property loan?

That depends on how you use the redrawn funds. Interest on investment property home loans is tax-deductible. A redraw facility makes sense if you use the funds for renovations on your investment property.

However, if you use the funds for a non-tax-deductible purpose like going on a holiday, it won’t be.

Are there minimum and maximum redraw facility amounts?

This depends on the policy of the lender. Some lenders will have minimum and maximum redraw amounts.

The maximum redraw amount for all lenders will be the total extra repayments you’ve made on your home loan.

Should you have an offset account with an investment property loan?

This depends on your investment goals. If you’re looking to maximise your tax-deductible interest, an offset account isn’t a good idea on an investment property loan. That’s because it reduces the interest you’re charged.

However, if you do want to reduce your interest, an offset account makes sense.

Does an offset account reduce your monthly repayments?

No, because the money in your offset account is only used to reduce your interest charge. Your repayments stay the same.  What effectively happens is that a larger portion of your repayment is applied to the principal portion of your loan rather than what previously would have gone towards interest. This provides major benefits to your overall costs as it will reduce the amount of total interest payable by allowing you to pay off your principal faster and therefore finish your loan off sooner than the initial agreed term of what likely would have been 25 or 30 years.

Can I get my salary paid into an offset account?

Yes.

Is there a maximum balance on an offset account?

This depends on the policy of the lender. You should look for an offset account that doesn’t have a maximum account balance limit. The more funds you can put in your offset account, the better.

Can I use an offset account at ATMs and for EFTPOS, BPAY and direct debits?

Again, this depends on the policy of the lender. However, you should look for maximum flexibility when choosing your offset account facility. Most lenders have these options within their standard offering.