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.|
|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.
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.