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Offset vs redraw: what's the difference and which is better?

Home loans are notoriously good at sucking up money. Not only do you have to be concerned about repaying your mortgage, but there is also interest to pay on top of that. Offset accounts and redraw facilities offer a way for borrowers to make big interest savings without too much effort.

Here we’ll look at the difference between an offset account and a redraw facility and which one you should opt for.

What is an offset account?

An offset account is a kind of savings account which is linked to your home loan balance. It is designed to help reduce the interest charged on top of your home loan. The money in your offset account is used to offset the home loan balance.

So, if you have a $500,000 home loan balance and $50,000 in your offset account, you’ll only be charged interest on $450,000.

When you’re potentially saving thousands in interest over the life of your home loan, you might be able to afford to pay it off early. Or, you can pocket the savings and put them towards a future investment, holiday or other big purchase.

What else should I know about an offset account?

  1. For an offset account to be most effective, it’s important to keep a substantial amount of money in the account. So while you can use your offset for everyday transactions, remember that the more money sitting in your offset, the less interest you’ll be charged.
  2. Most offset accounts attract a yearly or monthly fee, so always work out whether your savings will outweigh the cost.
  3. If you want to reduce the overall size of your mortgage, it may be better to pay it off directly, rather than leaving funds in an offset account.
  4. A 100% offset account is where 100% of the account balance is subtracted from the principal of a loan. Partial offset accounts are also an option.
  5. You can usually link an offset account to an investment property loan, so it’s not just for owner occupiers.

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What is a redraw facility?

A redraw facility is another way to reduce the amount of interest charged on your home loan amount. Essentially, your redraw facility is an account that pools any additional repayments you make on your home loan. Then, the funds in this account reduce your home loan balance and therefore the amount of interest you pay.

Another benefit of a redraw facility is that you are able to ‘redraw’ your extra repayments if you want. So, if you are planning renovations and need some extra cash, you can dip into your redraw facility funds. Bear in mind that you may be charged a withdrawal fee by your lender for doing so, meaning that it’s better not to use this account for regular transactions. Other lenders may offer a number of free redraws each year before charging you.

What else should I know about a redraw facility?

  1. You can only redraw the extra repayments you have made. If you have made $30,000 worth of extra repayments, you can withdraw this amount but not any more.
  2. Extra repayments can be made regularly or as a lump sum. Next time you receive a work bonus, tax refund or inheritance, consider putting it towards your home loan.
  3. The more money in your redraw facility (i.e. the more additional repayments you make), the more you’ll save in interest.
  4. Not all lenders will give you immediate access to redraw, so you may experience delays when withdrawing your extra repayments.
  5. Funds added to your redraw facility reduce the interest charged on the loan because there is a lower principal amount for the interest rate to be applied to.

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Should I use an offset account or a redraw facility?

You might not have to choose between the two, as many lenders will allow borrowers to use both home loan features simultaneously.

However, if you can only choose one, it’s important to consider which feature you are more likely to use and get the most out of. If you aren’t someone who makes very many extra home loan repayments, it might not make much sense to open a redraw facility. Or, if you don’t like to keep large amounts of money in a savings account, an offset account may not be the best option for you.

Not interested in getting an offset account or redraw facility but still want to save on interest? Your best bet might be to get a lower interest rate. Before you jump straight into refinancing, it’s worth asking your lender for a lower rate. If you have been a responsible borrower, it’s possible that they might give you a more competitive interest rate.

Can I get an offset account or redraw facility if I have a fixed rate home loan?

Offset accounts and redraw facilities aren’t guaranteed options for fixed rate borrowers. If you have or want a fixed interest rate home loan, you may need to search a little bit wider before you find a loan that meets your needs and comes with your desired features.

Something to keep in mind is that most lenders will charge break fees if you repay your loan early or violate your loan terms in some way. Offset accounts and redraw facilities can make it easier to pay off your mortgage sooner, so it’s important to be aware of any consequences for doing so.

A variable rate home loan comes with more flexibility and fewer restrictions for using these features. If you want to avoid potential break costs, wait until your fixed term ends and switch to a variable interest rate.

Can I get an offset account or redraw facility when I refinance?

Yes, refinancing your home loan could be the perfect opportunity to add a loan feature such as an offset account or redraw facility. A home loan refinance is all about changing your home loan to suit your current, up-to-date needs. While you may not have had the funds to put in an offset account when you initially obtained your loan, circumstances change.

Speak to your lender or mortgage broker to find out about adding an offset or redraw to your loan. Or, you can search and compare home loan options here.

Reducing the interest charged on your home loan through an offset account or redraw facility is a smart way to save money over your loan term and make steps towards owning your home outright. Not sure which is right for you? Speak to one of our friendly Home Loan Specialists for free expert advice.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: home loan, interest rate, variable interest, offset account, refinance, fixed interest, fixed rate home loans, fixed-rate mortgage, extra repayments, break cost, variable interest, redraw facility, redraw fee

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