Offset accounts and redraw facilities are both common home loan features, but do you know the difference between them?

Many home loans these days come with either an offset account, a redraw facility or both.

But how do they work, and which purposes might each one be best suited to?

What is an offset account?

An offset account is a transaction account which is linked to your home loan, but otherwise functions as a regular everyday account, often allowing you to withdraw money from ATMs and buy things using a debit card if you need to. The main benefit of an offset account is that the money you put into it is ‘offset’ daily against the balance of your home loan, and interest is charged against this reduced amount, rather than the full outstanding balance of your home loan. While many offset accounts will consider the full balance of your offset account when calculating your interest repayments (these are often referred to as 100% or ‘full’ offset accounts),, some offer a partial offset, in which only some of the balance of your offset account is taken into consideration.

Most lenders will charge a fee for the offset account by way of a direct fee or a ‘package fee’.

What is a redraw facility?

A redraw facility is a feature which lets you withdraw any additional repayments you’ve already made towards your home loan. A redraw facility generally doesn’t allow you to access any money that was made as a minimum repayment, however, so you’ll only be able to redraw funds that you contributed in excess of your minimum repayments.

Also worth noting is the fact that unlike an offset account, which typically offers near-instant access to your funds, a redraw facility may not offer same-day withdrawal, depending on the lender. Your home loan provider may also charge a fee on its redraw facilities. Some lenders may also have minimum redraw amounts (say minimum $1,000 per redraw), or limit how often you can make a withdrawal.

Offset account vs redraw facility – might one or both be right for me?

While those with a mortgage could benefit from either loan feature (or both of them), it’s important to note that redraw facilities and mortgage offset accounts may be better-suited to different kinds of mortgage holders.

For example, you could consider which of the two following goals is more important to you:

• Reducing the interest payable on your home loan while retaining day-to-day access to your cash: A mortgage offset account offsets the interest owing on your account, but leaves you with day-to-day access to the funds in the account. A mortgage offset account may be well-suited to homeowners who want to minimise the interest owing on their repayments, without necessarily paying extra off their principal. Majority of the lenders will charge a fee for the off-set account.
• Paying off the loan itself : Because it involves paying the money directly towards the loan, a redraw facility allows you to reduce the total balance of your home loan, rather than just reducing how much interest you have to pay in the short-term. This may be better-suited for those who want to pay off their mortgage earlier, while still retaining a level of access to their extra repayments up until the loan is paid off and closed or refinanced.

How much could a borrower save by using an offset account or redraw facility?

Regardless of the strategy you decide is right for you, any extra money that you can pay onto your mortgage or keep in an offset account, could save you a significant amount in interest over the long term.

Feel free to use our offset calculator or simply call us 1300FCGNOW.

But remember, features such as an offset account or redraw facility can add a cost to your home loan in the form of additional fees or a higher interest rate. That’s why it can be worth shopping around for a loan that offers a combination of a low rate and fees, plus additional features to help you get ahead.

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