Redraw Facility v Offset Account: What’s the difference?

There are several additional accounts or features that can be added to a home loan that can change how much interest you pay and how much cash you have available for yourself. Two of the most popular of these features associated with a variable loan are a Redraw Facility and an Offset Account. Let’s look at these two options and whether they might be right for you.

Redraw Facility

A redraw facility is a feature that is a part of your home loan. If you make extra payments towards your variable home loan, paying down the loan amount and reducing your interest payments, the facility then allows you to redraw that money in future if required.

Banks rarely charge additional costs for the redraw facility however there may be transaction costs associated when taking money from the home loan especially when carried out at a branch.

Only funds paid over the minimum repayments can be accessed through the redraw and banks can limit the amount of extra money you can pay into the account and therefore the amount available to redraw. Also, to access the money requires a bank transfer.

Example

Sarah has a $600,000 variable home loan. On her salary she saves an extra $10,000 each year, which she puts towards her home loan, building up her redraw reducing her interest payments. 

After 2 years, Sarah has paid an extra $20,000 towards her home loan with interest being charged to her home loan based on a $580,000 balance ($600,000-$20,000). When her sister decides to get married in Mallorca, Sarah redraws $5,000 from her home loan to pay for the trip.

Interest is now charged to her home loan based on a $585,000 balance ($600,000-$15,000)

Offset Account

An offset account is linked to your variable home loan as a separate transactional account that acts like any other current account for everyday spending. Any money that is held in that account is then offset against your home loan. For example, if you have a home loan of $500,000 and $100,000 in your offset account, your home loan is charged interest on $400,000.

Banks typically charge a package fee to access offset accounts, but this fee is usually accounted for by the lower interest rate associated on the package product with further benefit available from using an offset account.

Offset accounts can be especially helpful for those who want to save interest charged on their loan but still want the flexibility of maintaining access to that cash.

Offset Example

Tim and Tamara have both been working hard for 10 years and together have saved up $250,000. Tim and Tamara have two daughters and are in a point in their lives where access to extra funds is helpful for day-to-day life as well as unforeseen circumstances.

They have just bought a house for $1m but instead of putting all $250,000 towards the purchase and taking out a variable loan of $750,000, they put $200,000 towards the purchase, take out a variable loan of $800,000 and put the remaining $50,000 in an offset account, which they retain access to. 

The bank then offsets the $50,000 against the $800,000 loan meaning Tim and Tamara only pay the interest on $750,000. They retain access to the $50,000 in the offset for day-to-day expenses and a rainy day. 

When might you use these and which one is for you?

Both a redraw and an offset account will be beneficial if you have extra funds that can be put into them at any point in the life of the loan. The question arises as to why not just use that extra money to pay off the loan, but these options provide greater flexibility by allowing you to maintain access to cash.

An offset account has much easier accessibility as it acts as a regular transactional account. Funds in a redraw are more difficult to access as you’re required to transfer money out of the home loan with the additional psychological step of increasing your home loan.

Typically, the offset account is preferred as it provides the same benefit of reducing the interest paid on your loan, while still maintaining access to cash.

Ultimately however, these are decisions that are highly dependent on personal circumstances and best made alongside the help of professionals. If you would like to talk through whether an offset account or a redraw facility could be right for you, then please get in touch with one of our mortgage brokers at IFA.

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