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Offset vs Redraw, what's the difference?



What is an offset account?


An offset account is a useful home loan feature that can help you repay your loan faster and reduce the amount of interest you get charged.


An offset account is a transaction account linked to your home loan. Just like an everyday banking account, you can use it to receive your salary and can spend money via a debit card.


Offset accounts reduce the amount of interest you get charged. Imagine you had $300,000 outstanding on your mortgage and $20,000 in your offset account. Instead of being charged interest on $300,000, you'd be charged interest on only $280,000 (i.e. $300k minus $20k).



What is a redraw facility?


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 $300,000 outstanding on your mortgage and $20,000 in redraw, you’ll be charged interest on only $280,000 (i.e. $300k minus $20k)


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


But there are some key differences.


An offset account is a separate account that’s linked to the home loan – so when you put money into the account, it’s classified as a deposit rather than an extra repayment. That means if you take money out of the offset account, you’re reclaiming your own money.


A redraw facility sits within the home loan – so when you put money into the facility, it’s classified as an extra repayment rather than a deposit. That means if you take money out of the redraw facility, you’re technically re-borrowing the bank’s money. This may have tax consequences if you’re a property investor, so seek advice from a tax professional.


Some key differences to note: given that redraw is a transfer, it might take a little longer to access that money than if you were to get 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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