How redraw and offset accounts can save you money

Offset accounts and redraw facilities work in similar ways; they both
allow you to reduce the balance of your home loan, and therefore the
interest charged, by applying extra money to your debt.


Redraw facilities allow you to deposit spare income into your home
loan account, allowing you to redraw a sum equal to the extra
repayment amounts in future.

In the meantime, the extra money paid will lower the amount of
interest charged while still giving you access to your money.

However, there may be restrictions on how much money can be withdrawn and when.

“For redraw, it depends on whether the facility applies to a
fixed-rate or variable loan,” Moses says. “Most institutions only
allow redraw from a variable-rate loan, or fixed-rate loan but with
limited access.”

It is important to find out how a loan’s redraw facility works before
taking it on, as the fees and restriction attached might outweigh the
benefits of interest savings.

Deciding between an offset account and a redraw facility on your home
loan largely depends on how accessible you need your extra money to
be.

Offset accounts are like savings accounts that function alongside your
home loan. You earn interest on the money in the offset account and
you often have a debit card attached for simple withdrawals.

“Let’s say that you are paying five per cent interest on your home
loan and earning two per cent interest on your offset account,”
explains Heritage Bank NSW State Manager Paul Moses.

“In a offset setup, the difference would be 3%, but would mean that
the 2% interest that you earn is coming off the interest you are
paying on your home loan.”

With 100 per cent offset accounts, you earn interest equal to the
interest you are paying on your loan. Rather than earning savings
account rates, you are earning home loan account interest rates on the
money held within the offset account.

“Let’s say you have $10,000 in your 100 per cent offset account.
Instead of paying interest on your $100,000 loan, you are only paying
interest on $90,000,” Moses says. “That’s probably the best type to
have, if you are looking at offset accounts.”

Offset accounts, like many savings accounts, often come with account
fees, but the fee may be worth the interest savings and the added
flexibility compared to redraw facilities.

“There are less restrictions attached to 100 per cent offset accounts,
they’re very flexible. But really, it does just depends on each
lender,” Moses says.

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