Getting the Most Out of a Redraw Facility vs Offset Account
Redraw facility vs offset account: it’s the ultimate showdown in interest-saving home loan features. But which one is better for you?
The truth is, both redraw facilities and offset accounts have the power to save you money, but it’s really down to how you use them. This guide will explain the differences and similarities of each, so you can decide which one is a good fit for you.
- Both redraw facilities and offset accounts can help you save money by reducing the interest on your home loan.
- A redraw facility is part of your home loan account, whereas an offset account is a separate transaction account that is linked to your home loan.
- You can have both a redraw facility and an offset account as part of your home loan; your spending habits and financial goals will determine which is most effective for your needs.
What is a Redraw Facility?
Let’s start by looking at redraw facilities. A redraw facility allows you to redraw, or take out, the extra repayments you’ve made on a loan. It’s useful for people who want to pay down their loan more quickly, but also want the ability to access those extra funds if needed.
You will only be able to redraw repayments you’ve made that are above the minimum repayments for your home loan.
Most lenders make redrawing funds simple and convenient; it can usually be done online, over the phone, or in person at a branch.
However, not all home loans have a redraw facility, and the ones that do may charge fees for its use. Terms and conditions of redraw facilities vary between lenders and loans, so be sure to read the fine print.
What is an Offset Account?
An offset account is a regular transaction account that is linked to your home loan. It comes with a debit card and you can use it just as you would any other account, except for one significant difference.
When your lender calculates the interest on your home loan, they will subtract the amount in your offset account from the amount remaining on your loan. The amount in the offset account then ‘offsets’ the principal, resulting in lower interest.
Offset accounts may be offered as 100% full offset or partial offset; with partial offset accounts, your loan principal is not offset by the entire amount in the account. In either case, the more money you keep in your offset account, the less interest you pay.
One savvy way to use an offset account is by using a credit card for day-to-day expenses and paying it off in full before the end of the interest-free period. This way, your cash sits in the offset account longer, reducing your interest. However, this may not be a good option for people who aren’t disciplined with their credit cards.
Not all home loans include an offset account, and those that do may charge more for it. There may be a monthly account-keeping fee or a higher interest rate on the home loan. Offset accounts are generally only offered with variable rate home loans, though some lenders do provide them with fixed rate loans.
Tax Implications of Redraw Facility vs Offset Account
If your home becomes an investment property, you’ll need to take a closer look at the difference between redraw and offset.
Interest on an investment property is tax-deductible. Since an offset account is a separate transaction account, the money you withdraw and deposit will not affect your tax deductions.
With a redraw facility, however, there are restrictions. You can still claim interest as a tax deduction, but you may not be able to claim redrawn funds that were used for personal reasons unrelated to the property.
Pros and Cons of Redraw
Let’s look at the pros and cons of using a redraw facility.
Pros and Cons of an Offset Account
Now let’s look at the pros and cons of an offset account.
Redraw Facility vs. Offset Account
Both redraw facilities and offset accounts can help you save money, but whether or not they do is down to the way you use them.
A redraw facility may appeal more to people who find that money burns a hole in their pocket—if it was sitting in a regular transaction account, they might be tempted to spend it. By relying on redraw, it is still accessible but there are a few more barriers to getting it.
An offset account may appeal to people who have a good handle on their finances and are strict about the way they use the account. In order for an offset account to work effectively, you’ll need to keep a larger amount in there at all times. If you’re a paycheck-to-paycheck spender, an offset account probably isn’t for you.
If you like the idea of both a redraw facility and an offset account, you’re in luck: many loans offer both as an available feature. The way you use these features is up to you, so consider your financial goals and spending personality when comparing a redraw facility vs offset account.
Ready to shop around for a home loan that has the money-saving features you want? Use our home loan comparison tool to find the right loan for you at the right price.