Alan Hartstein
Athena Cocoves
Redraw and offset accounts both help you pay off your home loan more effectively. Both can maximise your finances, but each has its pros and cons. So, it can be highly beneficial to spend time comparing redraw vs offset accounts so you know which one to use — and when.
What are redraw and offset accounts?
Getting ahead on your mortgage repayments allows you to simultaneously build wealth and reduce debt. Both redraw and offset facilities can be instrumental in achieving those financial goals.
How redraw facilities work
A redraw facility lets you pay off more than the minimum repayment. You can then withdraw the excess payment amounts at any time as needed.
For example, say your minimum monthly repayments are $2000, and you pay off $3000 after 12 months. In that case, you’ll have $12,000 to redraw off your mortgage through a redraw facility.
A redraw facility offers an effective way to save as it reduces the principal and interest you’ll be paying in the long run. The interest rate on your mortgage is bound to be much higher than any interest earnings you could potentially make in a savings account.
With a redraw facility, you pay interest on the outstanding mortgage debt minus the amount in the redraw facility. So, if you have a mortgage for $200,000 and $30,000 of redraw equity, you only pay interest on $170,000.
How offset accounts work
An offset account is a transaction account linked to your mortgage. You can use it to offset the amount owed.
For example, if the amount owing on your mortgage is $500,000 and you have $50,000 in your offset account, you’re only paying interest on $450,000 — the difference between the two.
You can access the money in your offset account using a debit card or from an ATM, just like a regular transaction account. The money is always available immediately. Moreover, your offset account should come with all the features of an everyday savings account. So, there’s no need to keep the one you already have once you open an offset account.
Offset accounts can be partial or full.
- With a full (or 100%) offset account, every dollar goes toward paying off the interest on your mortgage.
- A partial offset account only offsets a percentage of the account balance against the mortgage.
Someone might take out a partial offset account because some lenders may charge more fees or even a higher mortgage interest rate for a full offset account.
Similarities and differences
Redraw and offset facilities are designed to help you save money in the long run by paying off your mortgage faster. However, there are some essential differences between the two.
Access to funds
An offset account allows you to instantly access your money, just like a standard bank account. On the other hand, a redraw facility is not an account but a feature of your mortgage. So, depending on your lender, it may take a few days to access your redraw funds.
Your lender may also limit the amount you can redraw. So, offset accounts are generally more flexible, especially if you need to access the funds urgently.
Fee structure
The fee structure of both is usually different, too.
- Offset accounts are bank accounts, so they usually attract account-keeping fees of some description. However, these shouldn’t be too great if your lender is serious about keeping your business.
- Redraw facilities should not come with fees. Though, you should always check with your lender to make sure. It’s also a good idea to have someone go over the fine print with you at the outset of the mortgage.
Impact on credit rating
Redraw and offset facilities are designed to help you pay off your mortgage sooner. If you consistently stay ahead of your repayments, they can boost your credit rating.
Repayment holidays
Unlike an offset account, a repayment facility may come with a repayment holiday. This feature lets you pause repayments for a certain period, typically up to a year, if you are sufficiently ahead with your account.
Tax on interest
The interest you earn in a savings account is considered income, so it is taxable. However, the money you save from your home loan interest in an offset account isn’t, so there are also tax benefits.
» MORE: Can you have multiple offset accounts?
Which is best for you?
Redraws and offsets are both effective tools for reducing your interest payments and how long it will take to pay off your mortgage. There are a few things to consider when deciding which is best for you.
Impact on amortisation
Using a mortgage calculator, you can see how they could save you hundreds of thousands of dollars over the term of your mortgage when used expeditiously.
For example, say you borrow $800,000 over 25 years with an average interest rate of 7.06%. Your monthly repayments would be $5654, and the total interest paid over the loan term is a massive $905,467. That means you end up paying more than double the cost of the property in total over the full term.
However, if you pay an extra $500 a month, the total interest bill comes down to $709,051 — saving nearly $200,000. In this scenario, the loan term is reduced to only 20 years, greatly accelerating your mortgage’s amortisation schedule.
Your financial profile
Deciding which option to go for can be tricky, though, and will depend on your financial profile.
If you are a disciplined saver and are comfortable not touching your funds, making the most of an offset account will probably benefit you more. You can deposit your salary and any other income directly into your offset account so you are paying down the mortgage at every available opportunity.
However, you might not trust yourself to be that disciplined. If so, you may be better off with a redraw because it takes longer to access the cash. Remember, a redraw facility serves the same purpose, but the money is not as readily available.
» MORE: 7 money management skills to master ASAP
Tax implications
Finally, look at the tax implications of redraws and offsets.
If you rent out your home as an investment property in the future, the interest charged on the loan may be tax deductible. However, you won’t be able to claim any of the money you’ve redrawn for non-investment purposes. Withdrawing money from your offset account will not affect the tax deductibility on your loan.
The tax implications can be tricky, so if you are considering moving and renting your property out, you should definitely talk to an accountant or financial planner.
Can you have both?
Yes, redraw and offset facilities are not mutually exclusive. Many lenders will allow you to combine the two should you choose.
For example, you can make an extra $200 monthly payment into a redraw facility and use an offset account as your everyday bank account. In such a scenario, both accounts are working towards the same goal for you.
Just remember that lenders have different fee structures, so you should always talk to an experienced financial planner or mortgage broker before deciding. In reality, there is no better option — just the one that suits you best at the time.
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