Redraw vs offset: what's the difference?

Many home loans these days come with an offset account, a redraw facility or both. These features can offer borrowers flexibility and savings if used carefully. But how exactly do they work and for which purposes might each one be better suited to?

What is an offset account?

An offset account is a transaction account from the same financial institution which is linked to a customer’s home loan but otherwise generally functions in the same way as an everyday transaction account. This means you can typically deposit money into an offset account, withdraw money from it and buy things using a linked debit card.

The main benefit of an offset account relative to an ordinary transaction account is that the money you put into it is ‘offset’ daily against the balance of your home loan, and interest is charged against this reduced amount, rather than the full outstanding balance of your home loan. This means that an offset account can lower your home loan interest repayments.

While many offset accounts will consider the full balance of your offset account when calculating your interest repayments (these are often referred to as ‘100%’ or ‘full’ offset accounts), some offer a ‘partial’ offset, in which only some of the balance of your offset account is taken into consideration.

For example, if you had $300,000 left to repay on your home loan but $50,000 sitting in a full offset account, you would only be charged interest on $250,000. If it were a 50% offset account, you would instead be charged interest on $275,000.

The majority of lenders offer 100% offset accounts but some may charge a fee, so these details are worth checking with your provider.

Offset accounts are commonly linked to variable rate home loans, but they can also be linked to a fixed rate home loan.

What is a redraw facility?

A redraw facility is a feature which lets you withdraw any additional repayments you’ve already made towards your home loan. It differs from an offset account in that it is not a separate bank account at all, but a feature which sits inside your home loan.

A redraw facility generally doesn’t allow you to access any money that was made as a minimum repayment, so you’ll normally only be able to redraw funds that you contributed in excess of your minimum repayments.

Also worth noting is the fact that unlike an offset account, which typically offers near-instant access to your funds, a redraw facility may not offer same-day withdrawal. It may take one or two business days for a redraw request to be processed, and your home loan provider may also charge a fee on its redraw facilities.

Some lenders may also have minimum redraw amounts, or limit how often you can make a withdrawal.

Is offset or redraw better?

While many Australian homeowners could benefit from either or both of these popular loan features, it’s important to note that either a redraw facility or a mortgage offset account may be better for you depending on your personal circumstances and preferences.

For example, you could consider which of the following goals is more important to you:

1. Reducing the interest you pay while keeping regular access to your cash:

A mortgage offset account reduces the home loan interest you pay based on the balance of the account, but leaves you with day-to-day access to the funds in the account. A mortgage offset account may therefore be well-suited to homeowners who want to minimise the interest owing on their repayments, without necessarily paying extra off their principal. But this also means a borrower with an offset account who doesn’t make any extra repayments may take longer to repay their home loan overall, than someone making regular extra repayments into a redraw facility.

2. Paying off the loan faster:

Because it involves making extra repayments directly towards your home loan, a redraw facility allows you to reduce the total balance of your home loan, rather than just reducing how much interest you have to pay. Accordingly, this may be better-suited to those who want to pay off their mortgage sooner, while still retaining a level of access to their extra repayments up until the loan is paid off and closed or refinanced. But the trade-off is that a redraw facility is generally not as flexible as an offset account in terms of how long it takes and how much it costs to withdraw money from it, so an offset account may work better if you think you’ll need to withdraw money from it often. Making regular withdrawals could also increase the time it takes you to pay off your loan in full, reducing the benefit of making extra repayments.

If you see both these goals as important for your needs, you may want to consider a home loan that offers both an offset account and a redraw facility. But bear in mind that while beneficial for many borrowers, home loan features such as these are not the only things to consider when comparing your options. Other factors, such as a loan’s interest rate, comparison rate and fees (including potential offset, redraw or early repayment fees), are also key considerations in determining its overall cost. It’s also important to consider whether any additional rebates or costs may apply in your situation, such as a First Home Owners Grant if you’re buying your first home, or lenders mortgage insurance if you have a low deposit.

How much could a borrower save by using an offset account or redraw facility?

Regardless of the strategy that you decide is right for you, any extra money that you can pay off on your mortgage or keep in an offset account could save you a significant amount in interest in the long run. But remember, features such as an offset account or redraw facility can also add costs to your home loan in the form of additional fees or a higher interest rate. While they perform a similar function in reducing the interest you pay on your home loan, there are also a few key differences that could be worth considering, including possible tax implications.

With this in mind, it can be worth shopping around for a loan that offers a combination of a low rate and fees, plus any additional features you’re interested in. Canstar’s Home Loan Star Ratings and Awards assess loans based on both price and features to help borrowers choose a product and lender to suit their needs. You may also want to consider seeking professional financial advice to help you reach a decision.

Offset vs redraw: What are the similarities?

Both offset accounts and redraw facilities offer the following:

• They can help reduce the amount of interest you pay on your home loan.
• They can help you pay off your loan earlier.
• They are generally available on most standard variable loans.

Offset vs redraw: What are the differences?

• An offset account works like a regular savings account and uses a debit card that is attached to your home loan. Whilst linked to your home loan it exists separately, so it provides flexibility to access your money instantly and without restriction.
• A redraw facility isn’t a transaction account, it’s a facility linked to your home loan. It allows you to make extra repayments on your home loan account and take them out again. It may not be as flexible as an offset account as you may incur fees in doing so, or it may take more time to access money that has already been paid to the bank as part of your home loan.

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