What is an Offset Account?

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An offset account is a useful home loan feature that can help you repay your loan faster and reduce the amount of interest you are charged. It is a transaction account linked to your home loan, similar to an everyday banking account. You can use it to receive your salary and spend money via a debit card. Offset accounts effectively reduce the amount of interest you pay.

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For example, if you have $500,000 outstanding on your mortgage and $100,000 in your offset account, you would only be charged interest on $400,000 ($500k minus $100k)

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What is a Redraw Facility?

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A redraw facility is a home loan feature you can use to reduce the amount of interest you pay. Here’s how redraw works:

 

• When you make extra repayments on your home loan, this money goes into redraw

• You can ‘borrow back’ (or redraw) this money when you need cash

• The money in your redraw facility reduces the interest you get charged

• If, for example, you have $500,000 outstanding on your mortgage and $100,000 in redraw, you’ll be charged interest on only $400,000 (i.e. $500k minus $100k)

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If you’re thinking a redraw facility sounds very similar to an offset account, you’d be right.

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Difference Between Offset and Redraw?

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An offset account is a separate account linked to the home loan. When you deposit money into the account, it's classified as a deposit rather than an extra repayment. This means that if you withdraw money from the offset account, you're essentially reclaiming your own money.

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On the other hand, a redraw facility is integrated within the home loan. When you deposit money into the facility, it's classified as an extra repayment rather than a deposit. Consequently, if you withdraw money from the redraw facility, you're technically re-borrowing the bank's money. It's important to note that this may have tax consequences, especially for property investors, so seeking advice from a tax professional is advisable.
 

Here are some key differences to note:
 

Since redraw involves a transfer, it might take a little longer to access that money compared to withdrawing it from an offset account. Also, some lenders charge fees to redraw, however the home loan itself may have lower fees attached overall compared to a more complex package with an offset account. 

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Every individual's circumstances are unique. Contact us to discuss your specific situation and explore the loan options that best suit your needs.