Many home loans these days have offset accounts and redraw facilities. In fact even in terms of fixed rate loans many providers are now offering either an offset account of a redraw facility. According to Canstar’s research, as of September 2016 Home Loans Star Ratings:
- 43% of financial institutions offer a full or partial offset account on at least one of their fixed-rate home loans
- 54% of financial institutions offer a redraw facility on at least one of their fixed rate home loans
So what are they, and which one is better?
An offset account is…
A transaction account which is linked to your home loan and which has normal transaction account functionality. The benefit is that the money in your account is offset daily against your loan balance, and this will reduce the mortgage interest charged accordingly. While most offset accounts will offset your loan balance in full, some only offer a partial offset.
Jenny and Mark owe $500,000 on their home loan. They recently won a $10,000 cash prize in a competition and decide to put this $10,000 into the full offset account linked to their home loan. For the period of time the offset account’s balance is kept at $10,000, interest would be charged on only $490,000 of their home loan.
A redraw facility is…
A feature which enables borrowers to withdraw money they have already contributed to pay off their loan. The balance of this facility consists of whatever extra payments the borrower has already made towards paying off their loan.
In many ways, redraw and offset facilities are quite similar. The main difference is that the money sitting in an offset account remains at call and easily accessible, whereas the money in a redraw facility, while accessible, isn’t available for same-day, at call withdrawal. There may also be a redraw fee associated with redrawing money from your loan (among the usual other home loan fees).
Jenny and Mark owe $500,000 on their home loan. They recently won a $10,000 cash prize in a competition and decide to put this $10,000 as an additional repayment towards their home loan.
Later, they decide to make home renovations to their kitchen. They decide they want to use that $10,000 they won for this purpose, so they apply to their lender to use the redraw facility on their home loan.
Because the $10,000 was an extra repayment on top of their required monthly repayments, the lender grants them the use of their redraw facility. A redraw fee is charged and when the funds are made available later that month, Jenny and Mark are able to withdraw the $10,000 to start making renovations to their kitchen.
Offset vs Redraw
While diligent savers will benefit from either kind of loan feature, it’s important to note that redraw facilities and mortgage offset accounts are better suited for different kinds of mortgage holders.
You have to decide for yourself if you want to do one of two things:
- Reduce the interest on your loan while maintaining day-to-day access of your cash: A mortgage offset account offsets the interest owing on your account, but enables you to have day-to-day access to the cash. A mortgage offset account can be used in a transactional way, so is ideally suited for home owners who want to minimise the interest owing on their repayments, without necessarily paying extra off their principal.
- Pay off the loan itself (known as the principal): By paying the money directly into the loan, a redraw facility allows you to make payments towards paying off the principal, rather than simply reducing interest in the short-term interest. This is better suited for those who have a focus on paying off their mortgage earlier.
Whichever type of facility you use, any extra that you can pay onto your mortgage can save you significant money in the long term. See for yourself by trying out our Home Loan Extra Payments Calculator.
Our comparison tables below provide further insight into the low rate product offerings available for home loans with either offset or redraw features, sorted by comparison rate (lowest to highest) with direct links to the providers website. Please note that this table features products that are based on a loan amount of $750,000 with a LVR of 80%, under a first home buyers profile in NSW.
Variable Home Loan Products Featuring Offset Accounts
Variable Home Loan Products Featuring Redraw Facilities