6 things you need to know about redraw and offset

1. They essentially do the same thing

Both reduce the interest that you pay on your home loan but an offset account can be a little more versatile.

An offset account is a transaction account linked to your home loan. The money you have in this account ‘offsets’ the amount you owe on your mortgage, and you’ll only be charged interest on the difference. You won’t be paid any interest on the money in your offset account (as less interest is charged on your loan account) which means generally there will be no tax payable. If you had your money in a traditional savings account you would have to pay tax on any interest earned.

Some people try to cut their interest costs further by having their salary paid into their offset account. The idea is that you use your credit card for living expenses, taking advantage of the interest-free period. During this time your salary is helping cut your home loan interest bill. A word of warning – this strategy only works if you don’t spend more than you earn and you repay your credit card before the interest-free period ends.

A redraw facility, on the other hand, sits inside your home loan, so it’s not a separate account.

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If you’re an owner-occupier who intends to move out of the family home one day and turn it into an investment property, you’d probably be better off with an offset account than a redraw facility. That’s because it could have a significant impact on your tax bill. It’s best to talk to a tax expert if this is something that you’re considering.

2. You used to pay a higher rate for offset but not so much now

Offset facilities were once only reserved for premium home loans with premium interest rates. That’s not so much the case now. Canstar’s research shows that although the average rate of loans offering offset is higher than that of loans without the feature, it’s possible to get a loan with offset for a competitive rate. So, if offset is important to you then it pays to shop around.

Minimum and average rates by offset availability

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Source: www.canstar.com.au – 31/10/2024. Based on owner occupier variable loans on Canstar’s database available for a loan amount of $600,000, 80% LVR and principal & interest repayments; excluding introductory, first home buyer only and other special condition loans.

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Everybody likes a discount which is why homeowners often opt for a home loan package. If you’re considering a package loan be sure to factor in the annual package fee and interest rate when making your decision. If you’re not using all the bells and whistles of a package loan you may be better off with a lower-rate home loan that just has the features you do need.

3. There’s little point having an offset facility if you don’t have money in it

A mortgage offset account can only save you money if you have money in it. And if you happen to be paying more for a home loan just because it has an offset facility, then you want to make sure you’ve got the right amount of cash in the account to ‘offset’ that higher rate. How much you actually need in the account comes down to a number of factors including loan size, interest difference and annual fees.

To give you an idea Canstar crunched the numbers on a hypothetical example. Let’s say you want to borrow $600,000 and you have the option to pick from one of three loans:

• Loan A has no offset and has an interest rate of 6.63% with no annual fee.
• Loan B has offset and charges an interest rate of 6.97% with no annual fee.
• Loan C is a package home loan that has offset and charges 6.73% plus a $286 annual fee.

Canstar’s analysis found you’d need at least $7,354 sitting in Loan B’s offset account and $3,697 sitting in Loan C’s offset for you to be better off than taking out Loan A – the loan with no offset.

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Work out your long-term saving goals and whether you will have money sitting in your offset account.

4. Minimum and maximum amounts can apply on redraws

There’s no shortage of home loans that come with redraw. It’s important to remember, though, that redraw isn’t an account as such, but rather a facility attached to your home loan, so you may not have the flexibility to access your money in the same way as a regular bank account.

Some lenders may stipulate minimum redraw limits and sometimes a maximum limit may even apply, although this is not as common. About 40% of loans on Canstar’s database have a minimum redraw limit while only 5% have a maximum limit. The average minimum limit is $516 and the average maximum is $32,917.

It’s also worth finding out if any redraw fees apply.

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These conditions may sound trivial but you can become stuck, for example, if you intend to draw on your savings in your redraw account to fund a renovation. Renovations often require several payments for jobs to get done so it’s better to know the conditions in case limits do apply.

5. Redraw and offset with non-banks can be a little different

How can a non-authorised deposit-taking institution, such as a mortgage lender, provide an offset account with all the transactional facilities like a bank account without being an approved ADI (Authorised Deposit-taking Institution)?

The answer to this question may be simple but the implication can be great for some borrowers.

Let me explain: non-ADIs can offer both offset and redraw. Let’s look at redraw first. As long as the overall balance (the difference between the home loan and the offset account) is not in credit then technically there are no savings, so there is no need for them to be an ADI.

In the unlikely event of the lender going broke, its portfolio of loans would be purchased and managed by another institution. It’s more than likely that the net loan would be taken over, meaning the amount that you owe and the redraw account would be combined, leaving you with equity rather than cash. This wouldn’t be ideal if you were saving this money for a holiday or your kid’s education.

As for offset accounts, non-banks often work with an approved ADI to offer the offset facility. Money in this offset account would be government-guaranteed. If the offset account is not provided by an ADI then chances are it’s essentially a redraw facility labelled as an offset account.

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As always the devil is in the detail. Be sure to ask your lender about what setup they have. Is it a true offset account and whose name is the money held in?

6. If your circumstances change your bank can shut down your redraw

Most mortgage contracts give lenders the right to cancel features such as redraw. Generally, they would do this only if you were in arrears or your circumstances drastically changed.

It’s important to note though that conditions around redraw differ between lenders and you should take the time to read through the contract to find out where you stand.

If you’re uneasy about the clauses you find, then the answer might be as simple as swapping your redraw facility for a mortgage offset.

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Redraw often only requires one signature on the account. In a relationship breakdown, it may pay to contact your lender to cancel the redraw facility or request that both of you have to sign when redrawing any available money.

What happens to a redraw facility when the loan is paid off?

Your redraw facility will no longer be available once you have paid off your home loan, at which point both your loan balance and the available redraw balance will be zero.

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