Many home loans these days come with either an offset account, a redraw facility or both. Both of these features can offer borrowers flexibility and potential financial savings if used carefully, but how exactly do they work, and which purposes might each one be better suited to?
In this article, we cover:
If you’re currently considering a home loan, the comparison table below displays some of the variable rate home loans on our database with links to lenders’ websites that are available for first home buyers. This table is sorted by Star Rating (highest to lowest), followed by comparison rate (lowest-highest). Products shown are principal and interest home loans available for a loan amount of $350K in NSW with an LVR of 80% of the property value and that offer an offset account. Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products.
*Comparison rate based on loan amount of $150,000 and a term of 25 years. Read the Comparison Rate Warning.
What is an offset account?
An offset account is a transaction account which is linked to a customer’s home loan with the same institution, but otherwise generally functions as a regular everyday account. This means you can generally deposit money into an offset account, withdraw money from it, and buy things using a debit card linked to it if you need to.
The main benefit of an offset account compared 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.
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.
As a hypothetical 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.
According to recent Canstar analysis of the owner-occupier and investment home loans on our database, the vast majority of variable rate loans (93.7%) – along with over one-third of fixed rate loans (35%) – offer a full offset account at the time of writing. Some lenders may charge a fee on their offset accounts, so this could be worth confirming with your provider.
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.
Canstar figures at the time of writing show all variable rate home loans and a majority (61.7%) of fixed rate home loans on our database offer a redraw facility.
Offset account vs redraw facility – which is better?
While many Australian homeowners could benefit from either or both of these popular loan features, it’s important to note that redraw facilities and mortgage offset accounts may be more or less suitable for different kinds of borrowers, meaning which one is better for you will depend 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.
However, this also means a borrower with an offset account who did not 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.
However, 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. However, bear in mind that while beneficial for many borrowers, home loan features like 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 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.
The hypothetical example below shows the amounts a borrower could save in interest over the life of a 30-year home loan by having various levels of funds saved in a linked offset account or paid into the loan as extra repayments and available to redraw. The interest savings for the two features would be the same in this scenario, though this assumes the borrower puts the offset or redraw amount in at the start of the loan and makes no further deposits, extra repayments or withdrawals.
Greater potential savings could result if the borrower deposited money regularly into their offset account, or made regular extra repayments into their redraw facility, while these interest savings could be reduced if they withdrew more money from their offset account or redraw facility than they put back in.
Offset account or one-off lump sum repayment into a redraw facility: impact with a $500,000 loan
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at start of loan
|Total interest paid
over life of loan
Source: www.canstar.com.au. Based on a $500,000 loan with an interest rate of 3%, repaid over 30 years with principal & interest repayments. It is assumed that the offset account balance is kept constant at the specified amount for the entire loan term, or alternatively that the lump sum repayment of the specified amount is made at the start of the loan. Calculations do not take into account any fees that may apply.
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. And while they perform a similar function in reducing the interest you pay on your home loan, they share a few key differences with each other 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.
Additional reporting by James Hurwood.
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