Offset vs. Redraw

We’ve answered some of the more commonly asked questions about offset and redraw loan facilities below, to help you work out whether these features are right for you.

What is the difference between an offset account and a redraw facility?

In a nutshell, offset accounts and redraw facilities are two home loan features that use any extra income or savings to reduce the balance of your loan, in turn reducing your interest costs - which can help you to save thousands of dollars over the life of your loan.

An offset account is usually a transactional account, which is linked to your home loan. The balance held in this account offsets’ the balance in the mortgage, helping you to reduce the interest paid and overall term of the loan. Many lenders offer a 100% offset account as a feature with standard variable home loans and some with fixed rate loans.

A redraw facility is a home loan feature that is attached to your mortgage and gives you the opportunity to make extra repayments on your home loan – which helps to reduce the interest costs. You then have the option to ‘redraw’ the extra funds you have paid into your mortgage if the need arises.

What are the main benefits of both loan features?

One of the main benefits of a redraw facility is the fact that it ‘forces’ you to save. Different lenders will have different rules when it comes to redraw facilities. Some lenders will limit you to as few as two redraws a year, while others may charge a fee per withdrawal or require that a certain minimum amount be withdrawn every time. While this doesn’t sound particularly flexible, it forces you to leave any extra funds you have pumped into your mortgage alone, as the fees and minimum withdrawal rules act as a deterrent to withdrawing money.

There are also some benefits associated with an offset account. In the first instance, it’s very easy to deposit and withdraw money from your offset account because it acts in the same way as an everyday transactional account. Further, in an offset account, interest is calculated daily, so whether you save regularly or live pay-to-pay, as soon as there are some savings in your offset account for more than one day at any point in time, you will benefit from the offset impact on your home loan.