Offset Accounts vs Redraw Facilities: Which Saves More

Offset accounts and redraw facilities both let you reduce the interest charged on your home loan. Each works differently and suits different borrowing situations. Understanding how they compare can help you choose the right feature for your circumstances.

An offset account is a savings or transaction account linked to your home loan. The balance in this account reduces your loan balance daily before interest is calculated. A redraw facility lets you access extra repayments you've made above your minimum monthly amount.

How Offset Accounts Work

Offset accounts reduce your loan balance for interest calculation purposes. If you have a $500,000 home loan and $10,000 in a 100% offset account, you pay interest on $490,000.

Your home loan interest calculates daily. Every dollar in your offset account reduces the interest charged that day. More of your repayment goes toward the principal, which can reduce your loan term depending on your repayment strategy.

Two types of offset accounts are available. A 100% offset account applies your full account balance against your loan before calculating interest. A partial offset account only applies a percentage of your balance, typically 50% to 60%.

Benefits of Offset Accounts

Offset accounts work like everyday transaction accounts. You can deposit your salary directly and make purchases using a linked debit card. Your money remains accessible while potentially reducing your interest costs.

Multiple offset accounts can link to one home loan with some lenders. You might use separate accounts for different savings goals while still reducing your loan interest. This setup suits people who prefer to separate their finances by purpose.

The interest you avoid paying on your home loan typically exceeds what you'd earn in a savings account. Home loan rates are generally higher than savings account rates, making offset accounts potentially more valuable for reducing total interest costs.

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How Redraw Facilities Work

Redraw facilities let you access extra repayments you've made above your minimum monthly requirement. If your minimum repayment is $700 monthly and you pay $900 for 12 months, you can redraw the extra $2,400, subject to lender terms.

Extra payments reduce your loan balance and the interest charged on that balance. When you redraw funds, your loan balance increases back to what it would have been without the extra payments.

Benefits of Redraw Facilities

Redraw facilities suit borrowers who want emergency access to funds without maintaining a separate savings account. Your extra repayments may reduce interest costs equivalent to your home loan interest rate by reducing the balance on which interest calculates.

This arrangement may offer tax advantages compared to earning interest in a savings account. Interest earned on savings accounts forms part of your taxable income. Interest saved through extra repayments faces no tax implications. Tax treatment varies — speak with your accountant.

Redraw facilities often cost less than offset accounts. Many lenders include redraw at no extra charge, while offset accounts typically require a package loan with annual fees.

Important Considerations

Offset accounts usually form part of package loans with annual fees ranging from $200 to $400. Fees and rates vary by lender and are subject to change — confirm current pricing with your broker. Calculate whether the interest you save exceeds these fees before choosing an offset account.

Some lenders require minimum balances in offset accounts, typically $1,000 to $5,000. LVR limits vary by lender and are subject to individual assessment. Check these requirements when comparing options.

Fixed rate loans may not offer offset accounts, or may limit offset functionality. Variable rate loans generally provide full offset account access.

Redraw facilities may include withdrawal limits and fees. Some lenders charge $10 to $25 per redraw transaction. Others offer unlimited free redraws but set minimum withdrawal amounts, sometimes as high as $5,000.

Lenders may restrict redraw access if you fall behind on repayments or if your loan falls outside their lending criteria. Offset account funds remain accessible as they're held in a separate account.

Investment Property Considerations

Investment property owners often prefer offset accounts for tax planning purposes. Interest on investment loans is generally tax deductible when the loan purpose is to generate rental income.

Using an offset account against your owner-occupied loan preserves the tax deductibility of your investment loan. You can withdraw offset funds for personal use without affecting the investment loan's tax treatment.

Redraw from investment loans may affect tax deductibility if you use the funds for personal purposes. Speak with your accountant about the tax implications before accessing redraw on investment properties.

Which Option Suits Your Situation

Offset accounts suit borrowers who want transaction account functionality with interest savings. They work well if you maintain higher account balances and don't mind paying package loan fees.

Redraw facilities suit borrowers who make irregular extra payments and need occasional access to those funds. They typically cost less but offer less day-to-day flexibility.

Consider how often you'll access your funds. Daily transaction needs favour offset accounts. Occasional emergency access suits redraw facilities.

Your mortgage broker can compare both options across different lenders and loan types. Package loan benefits sometimes outweigh the annual fees when you factor in rate discounts and other features, subject to lender assessment.