Many home loans these days come with either an offset account, a redraw facility or both. According to Canstar’s research, as of our March 2020 Home Loan Star Ratings:
- 74.7% of financial institutions on our database offer a full offset account on at least one of their fixed-rate home loans
- 98.2% of financial institutions on our database offer a redraw facility on at least one of their fixed-rate home loans
But how do they work, and which purposes might each one be best suited to?
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 your home loan, but otherwise functions as a regular everyday account, often allowing you to withdraw money from ATMs and buy things using a debit card if you need to. The main benefit of an offset 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.
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. A redraw facility generally doesn’t allow you to access any money that was made as a minimum repayment, however, so you’ll 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 the redraw 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.
Offset account vs redraw facility – might one or both be right for me?
While those with a mortgage could benefit from either loan feature (or both of them), it’s important to note that redraw facilities and mortgage offset accounts may be better-suited to different kinds of mortgage holders.
For example, you could consider which of the two following goals is more important to you:
- Reducing the interest payable on your home loan while retaining day-to-day access to your cash: A mortgage offset account offsets the interest owing on your account, but leaves you with day-to-day access to the funds in the account. A mortgage offset account may be well-suited to homeowners who want to minimise the interest owing on their repayments, without necessarily paying extra off their principal.
- Paying off the loan itself : Because it involves paying the money directly towards the 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 in the short-term. This may be better-suited for those who want to pay off their mortgage earlier, while still retaining a level of access to their extra repayments up until the loan is paid off and closed or refinanced.
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 onto your mortgage or keep in an offset account, could save you a significant amount in interest over the long term
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.
|Impact of offset account or one-off lump sum repayment into a redraw facility ($400,000 loan)|
|Offset amount / redraw amount at start of loan||Total interest paid over life of loan||Interest saved|
|Source: www.canstar.com.au – 14/07/2020. Calculations use the average variable rate based on owner occupier loans available for a loan amount of $400,000, 80% LVR and principal & interest repayments; excluding introductory and first home buyer only loans. Calculations also assume a total loan term of 30 years, and that the offset account balance is kept constant at the specified amount for the entire loan term or 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 add a cost to your home loan in the form of additional fees or a higher interest rate. That’s why it can be worth shopping around for a loan that offers a combination of a low rate and fees, plus additional features to help you get ahead. Canstar’s Home Loan Star Ratings assess loans based on both price and features to help borrowers find products that offer outstanding value. You can view the Star Ratings that each of the products on our database received using our comparison tables.
Originally written by Justine Davies