Redraw facilities and offset accounts let you use extra money to reduce your interest repayments and still access the cash if needed. But they're quite different features.
- Offset accounts. You can save money in an offset account just like a bank account, but this money reduces your loan size while it's in the account. This means you pay less interest and repay the mortgage faster.
- Redraw facilities. If you make extra repayments into your mortgage a redraw facility allows you to pull that money out later when you need it.
Both features give you greater control over your mortgage while allowing you to save on interest.
Offset account versus redraw facility
| Offset account | Redraw facility | |
|---|---|---|
| How it works | A separate bank account attached to your home loan, the money in an offset account acts like an extra repayment but is yours to spend as you need. | Any extra repayments you have made onto your home loan can be "redrawn" or removed from the loan to spend as needed. |
| Benefit | Spend the money when you need it, but while it's in the account you're paying less interest. | Extra repayments mean you pass less interest, but being able to redraw this money helps in an emergency. |
| Drawbacks | Mortgages with offset accounts tend to have slightly higher interest rates. Unlike a savings account, money in an offset doesn't generate interest for you (but it saves you more in interest charges). | Your lender may specify a minimum amount you can redraw. Some lenders reduce the amount of your extra repayments you can access over time. |
| Flexibility | Offset accounts give you more control over your money. While it's in the offset account, it's your cash (but do read the fine print on your mortgage). | Extra repayments are the lender's money; they just allow you to access some of it. |
| Access | Card, ATM, online or bank branch, depending on the lender. | Varies by lender, but usually online and sometimes via branch or ATM. |
| Separate account? | Yes | No |
| Fees | Most lenders don't charge a fee for this feature, but there are a few loans that let you add an offset for a monthly fee (usually around $10). | Some lenders charge a fee each time you redraw money from the loan. |
How a redraw facility works
- Your minimum monthly loan repayments are $500.
- But you pay $700 each month for 6 months, which equals $1200 in extra repayments.
- A redraw facility allows you to access that extra $1200 if you need to.
Many redraw facilities will come with additional fees for withdrawing and depositing money. There may also be restrictions on how much and how often you can redraw in any given period. Check the terms and conditions of your home loan contract for specific information about redraw restrictions.
Find home loans with no minimum redraw
How an offset account works
- You owe $300,000 on your home loan
- You save $10,000 in your offset account
- Your lender only charges interest on $290,000
If you need to spend that $10,000, then you're back to $300,000 and you'll pay more interest again.
Use our offset calculator and try it for yourself.
How can I get the most of out a mortgage offset?
The trick to getting the biggest benefits from these accounts is to keep as much money in them as possible, for as long as possible.
There are a couple of ways to do this:
- Have your wages paid directly into your offset. By doing this for at least a few days (as long as you don’t withdraw it all at once) your balance will be fairly high. If you have any savings you should also think about moving them into your offset.
- Consider making all your purchases on a credit card. By paying for all your daily transactions with a credit card, you’re keeping your offset account balance as high as possible for as long as possible, because you're not using your savings to pay for anything. Instead, you simply pay off your entire credit card debt at the end of the month. The offset with credit card strategy requires discipline, because you'll face big interest charges if you don't repay your credit card on time.
Offset account vs redraw facility: our verdict
This depends on your personal and financial situation. Both types of home loan offer money saving benefits. Both give you the chance to save interest and repay your loan earlier. The main thing is to decide what you really want from the loan.
- For paying less interest on your mortgage: both features work fine.
- For flexibility and control: offset accounts. An offset account gives you much more control over your money. Recently, the Commonwealth Bank adjusted its redraw rule so your extra repayments reduce over time as they're folded back into the loan. This means you can't rely on accessing all of that money. With an offset account you still can.
- For keeping it simple: redraw facility. Redraw is a more common feature than an offset account. If your only concern is to pull out extra repayments in an emergency then redraw is probably fine.
Say I borrow $100,000 investment loan and I have say $80,000 savings. There is the offset loan which comes with higher interest rates and fees and there is redraw loan with lower interest rates and low/zero fees. From investment purposes, which one allows “greater tax benefits/deduction”? Assuming you don’t need to access the $80,000 anytime in near future. Please advise. Thanks.
Hi Michelle,
Thank you for getting in touch. Please note that finder is a comparison webs ite and general information service, so we can only offer general advice.
As we are not tax experts, we can’t really tell which of the two allows you to get more tax benefits, but generally, this would depend on some factors. Nevertheless, you may take a look at our guides on “How tax can help your offset home loan” and “Investment property tax spreadsheet” and hope you can find it helpful. Also. I would suggest that you contact a tax agent/accountant who can best advise as they take your personal circumstance into account.
Cheers,
May
Hello,
I recently refinanced with my same lender and currently have a home loan with a debt of $92,000, and redraw funds of $162,000. I have just noticed that the bank is charging me weekly repayments on a loan amount of $254,000 (so the total amount of debt and redraw funds). I was lead to believe that my repayments would be calculated on the debt only, and not the redraw funds. Is this correct, or have I misunderstood? I am extremely concerned if I have got it wrong, as I’ve just committed to a 3 year package, which includes another 2 loans. This particular loan that I am asking about is a variable interest rate, the other 2 are fixed interest rates.
Many thanks,
Fiona.
Hi Fiona,
Thanks for your question.
After you redraw money from your home loan, the interest part of your repayments will increase because you will be paying interest on your original home loan and your redraw funds. This is true for most home loans with redraw facility.
It is best if you review the terms and conditions of your home loan to check how much you’ll be charged for accessing your redraw funds.
Cheers,
Anndy
If I have a redraw amount of say $40,000 and a mortgage of $80,000 what exactly does that mean?
Hi Judy,
Thanks for your question.
If you have a redraw amount of $40,000, this means that you can access that amount if you need to, although lenders only do this in the case of an emergency.
Kindly note that a lot of the redraw facilities will come with additional fees for withdrawing and depositing money. The lenders may charge these fees straight away or they may give you a few free redraws and deposits a month. There may also be restrictions on how much and how often you can redraw in any given period. Check the terms and conditions of your home loan contract for specific information about redraw restrictions.
Cheers,
Anndy
My question is if one loan is 108,000 and another is 221,843.
One house is sold for 210.00 which leaves 329843 minus 210000 plus 6270 agent fees a total of 126113. how can hat leave the bank loan of 144000?
Which is supposed to be from a redraw amount I didn’t even know I had and I am not allowed to take off principal. Don’t understand
Hi Lisa,
I’m sorry, I don’t understand what you are trying to say. Could you please give me a bit more context?
Cheers,
Shirley