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Redraw vs offset: what’s the difference?
A redraw facility lets you take extra payments back out of your mortgage, while an offset keeps your money separate. Both help you pay less mortgage interest – but in different ways.
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- Redraw facility. If you make extra repayments into your mortgage, a redraw facility allows you to take that money out again later when you need it. While the money sits in your mortgage, it reduces the interest you pay.
- Offset account. You can save money in an offset account, which is just like a bank account, but attached to your home loan. This money reduces the interest you pay while it's in the account, so you pay more off the principal and repay the mortgage faster, but the money is easy to access.
Both features give you the ability to pay less interest on your mortgage, but in slightly different ways. Also, a redraw has some restrictions and fees around withdrawals, while an offset account offers easier access to your money at a moment's notice – which can be a blessing and a curse.
Offset account versus redraw facility
|Offset account||Redraw facility|
|How it works||A separate bank account is attached to your home loan. The money in your offset account acts like an extra repayment in terms of how your mortgage interest is calculated, but it is yours to spend as you need.||You make an extra repayment/s onto your home loan. This money 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'll pay 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 may have slightly higher interest rates. Also, unlike a savings account, money in an offset doesn't generate interest for you, but it saves you more in interest charges than you would earn in interest anyway.||Your lender may specify a minimum amount you can redraw; often the minimum redraw amount is $500. Some lenders reduce the amount of your extra repayments you can make over time.|
|Flexibility||Offset accounts give you more control over your money. While it's in the offset account, it's your cash; you can withdraw any amount, from 0.5c to $50,000, and spend it at your discretion at any time.||Extra repayments are technically the lender's money as the funds have been repaid on the loan. They allow you to access some of it at their discretion.|
|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 it may form part of a professional package with an annual fee. Some lenders also charge a monthly offset account fee (usually around $10).||Some lenders charge a fee each time you redraw money from the loan. Others specify a minimum redraw amount, and/or a maximum number of redraws per year.|
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.
Offset account vs redraw facility: which one saves you more money?
An offset account will give you greater flexibility and control over your cash, while offering the same benefits as redraw. Both an offset and redraw will save you a similar amount of interest. For instance, if you have $10,000 and you're trying to decide whether to make an extra repayment with the potential to redraw later, or to place that $10,000 in an offset account, both options will save you the same amount of interest on your home loan.
The main thing to consider is what you really want from your home 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 because it's entirely your money.
- For keeping it simple: redraw facility. Redraw allows you to set and forget your extra repayments, and only pull out funds via redraw in an emergency.
- For maximising investment interest deductions. You really need an offset account in this scenario.
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.
Compare mortgages which have redraw facilities or offset accounts
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
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