If you want to pay off your home loan faster, a redraw facility or offset account could be the answer. We analyse the differences.
Offset accounts and redraw facilities both allow you to put money against the loan, but a redraw facility allows you to put money straight on the loan while an offset account allows you to put money against the loan indirectly.
What is a redraw facility?
A home loan with a redraw facility allows you to borrow money you’ve already repaid and is usually offered with variable interest rate loans. A redraw facility allows you to be flexible with how you repay the loan. If you have spare money in your savings, you can pay this onto the loan.
For example, your minimum monthly loan repayments are $500. If you pay $700 each month for a period of 6 months you’ll have paid an extra $1200 on top of what you had to pay. A redraw facility allows you to access that extra $1200 if you need to, though borrowers only do this in the case of an emergency.
What are the features of a redraw facility?
Money in a redraw facility will go straight against the loan. This will reduce the amount you pay in interest and help you pay off the loan quicker. However, many redraw facilities will come with additional fees for withdrawing and depositing money. The providers 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.
Compare home loans with redraw facilities
What is an offset account?
An offset account is a savings account that is linked to a loan. Any funds that are deposited into the savings account are "offset" against the loan. The lender then reduces the amount on which interest is calculated by the amount in your offset account. In other words, if you owe $300,000 on your home loan and you have $10,000 in your offset account your lender will only be charging you daily interest on $290,000.
What are the features of an offset account?
The offset account will allow you to reduce the amount of interest you pay. You do this by depositing money into the offset account. These accounts will usually have unlimited free withdrawals and deposits. However, to use the offset account effectively you will need a significant amount in your account.
Compare Home Loans with Offset Accounts
What are the benefits of an offset account?
The more you have in your offset account, the less you owe in interest and that means less for you to pay overall. The trick to getting the biggest benefits from these accounts is to keep as much money in them 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 the whole month. However, you must repay your credit card bill at the end of the month to avoid interest. It’s imperative you repay your bill on time, otherwise any savings or benefits you gain from your offset account will be wiped out by credit card interest.
Important information
You could save thousands of dollars in interest over the life of your loan.
Is a redraw facility or offset account better?
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.
An offset account will be most beneficial those with a good enough income to keep the balance fairly high each month. If you’re only ever going to have $100 sitting in it you, won’t make much of a dent in your balance. If, on the other hand, you have a secure income and are comfortable using your credit card for day-to-day transactions, you can reduce your term by a substantial amount.
If you can make overpayments now and then and like the idea of an “emergency fund” running in the background you might be better suited to a redraw account. As long as you can make overpayments at least a few times a year then you will be making the most of this feature.
Think about your budget, your income and your long term financial goals. Both offset and redraw accounts have their benefits, so think about what you want and then compare various home loans until you get the best deal.
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