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The Difference Between Redraw vs Offset Accounts
The Difference Between Redraw vs Offset Accounts
Written by
Tina Sendin
Edited by
Andrew Kemp
Reviewed by
Sam HymanCompare home loans the easy way
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Long story short
Offset accounts reduce interest without tying up your savings
Your offset account’s balance is subtracted from your home loan when calculating interest, meaning that as its balance grows you’ll pay less interest.
Withdrawing from redraw facilities could come with extra fees, limits, or minimum amounts
Redraw facilities aren’t as easy to access as offset accounts, so they could encourage savings habits – with lower fees.
Using either option could help you create a flow-on effect for your mortgage
Paying less interest means paying off the principal faster, which could slice years off your loan term.
Offset accounts could protect your tax deductions if you rent out the house
Accessing funds from a redraw facility to buy an investment property could mess with your tax perks.
What is a redraw account?
Some home loan accounts have a redraw facility, which lets you make extra payments and withdraw that money later, if needed. It’s not a standalone bank account, but rather a part of your home loan. So, while you can access your surplus, you can’t touch whatever was required to meet your minimum repayments.
Redraw facilities are usually available with variable-rate home loans, although some fixed-rate loans might offer limited redraw options. It really depends on the lender and their specific rules – making it worth comparing home loans and their features!
How does a redraw facility work?
Any payments above the minimum amount that your lender requires each month count towards your outstanding balance, but are still available to you through a redraw request. Because these extra payments reduce your home loan balance, you’ll end up paying less interest than if you’d just made your minimum repayments.
A redraw facility gives you the ability to withdraw those additional repayments down the track if you suddenly need access to them – for things like a renovation, an emergency, or even a holiday. You could withdraw through online banking, a phone call, or visiting your lender face-to-face – although sometimes you might have to wait for a few days for the money to become available.
Just a heads up: you generally need to be ahead on your schedule before lenders will let you redraw. There might also be rules about minimum amounts or how often you can pull money out.
Redraw facilities are great for disciplined savers (or borrowers needing an extra guardrail) who want a buffer and don’t need regular, access to those extra funds. You can think of it this way: it’s brilliant for long-term savings and ‘forced’ discipline, and perhaps not for buying clothes or paying for a night out.
What is an offset account?
An offset account behaves similar to an everyday transaction account except for the fact that its balance is linked to your home loan, reducing the amount of interest you pay. When your lender calculates your interest payments it will reduce the base loan balance by how much is in your offset account, all while keeping your money easily accessible.
You can deposit your salary into it, get a linked debit or credit card so you shop using EFTPOS, get cash out from ATMs, and freely transfer money in and out.
How does an offset account work?
Any money in your offset account directly reduces (or ‘offsets’) the balance of your home loan, which means you’ll pay less interest. Basically, the bank subtracts the funds in your offset account from your total loan balance to figure out how much interest to charge. And since interest is typically calculated daily, having money in your offset account means you’re paying interest on a smaller loan amount every day.
For example, if you’ve got a $500,000 loan and $20,000 in your offset account, you’ll only pay interest on $480,000. Over time, that can save you a heap in home loan interest! Plus, your money isn’t locked away – it’s yours to use whenever you need it. That does mean if you decide to spend $5,000 on a holiday, you’ll start paying interest on $485,000.
Just keep in mind, offset accounts are more commonly linked to variable-rate home loans, rather than fixed-rate ones.
Helpful tip
While offset accounts are typically linked to variable-rate home loans, some lenders do offer them with fixed-rate loans – though the options can be quite limited. For example, a lender might provide partial offset accounts for fixed loans but place strict limits on access to a full 100% offset.
A split loan is another option you might also want to consider! This lets you fix part of your loan for stability while keeping the other portion variable and linked to an offset account. That way, you can save on interest for the variable part without completely losing the predictability of fixed home loan repayments.
Sam Hyman
General Manager – National Sales, Aussie
Is it better to have a redraw or offset account for my loan?
A redraw facility is ideal if you’re good at making extra repayments and don’t need frequent access to those extra funds. On the other hand, an offset account works well if you want to keep a large amount of savings handy while still having easy access to your money.
How you manage your cash flow and your future property plans can inform your decision. Both options can open the door to interest savings as long as you keep adding extra funds and (hopefully) don’t touch them.
Here’s a breakdown of their pros and cons:
Redraw facility
Pros
- encourages saving by making funds slightly harder to access
- often included in low-fee loans with competitive interest rates
- actively reduces your debt, helping you pay off your loan faster
- lower fees compared to offset accounts.
Cons
- requires being ahead on repayments to get a redraw facility
- withdrawals may take time to process and could have fees
- redrawn funds may affect tax deductibility of an investment property
- minimum withdrawal limits can restrict access.
Offset account
Pros
- full access to your money for everyday expenses or emergencies
- reduces the loan balance used for interest calculation, helping you pay off your loan faster
- access savings without changing the loan, which can be useful if you later rent it out.
Cons
- easy access may tempt spending rather than saving
- often comes with monthly or annual fees
- typically only available with variable-rate loans
- loans with offset accounts may have slightly higher interest rates.
Now, let’s look at the numbers. Assuming your interest rate and fees are exactly the same, which option saves you more money? All things being equal, they should each save the exact same amount of interest. But there are slight differences in how account usage can change that outcome.
To see what we mean, let’s look at a couple of fictional scenarios.
Our fictional friend Aliya has a $500,000 home loan with a 6% interest rate.
Scenario A: Aliya makes a $50,000 lump sum deposit in her offset account from an inheritance.
Scenario B: Aliya makes a $50,000 lump sum extra repayment into her loan, which has a redraw facility, from an inheritance.
In both scenarios, Aliya pays less interest because her lender will calculate her interest on a balance of $450,000 – the difference after deducting $50,000 from $500,000. But what the above scenario fails to calculate is the effect that regular income streams can have on interest payments.
Daily interest calculations
In both scenarios, Aliya deposited a one-off lump sum from an inheritance. However, if Scenario A’s Aliya used her offset account to receive other income streams – such as a salary – this would also help reduce her interest payments.
It’s unlikely that Scenario B’s Aliya would deposit her salary directly into her loan, as this would make it more difficult to manage her day-to-day expenses.
Access and costs
An offset account also allows Aliya to easily access the $50,000 in case of an emergency, though she may need to contact her lender to adjust transfer or withdrawal limits.
With a redraw facility, Aliya would need to consider whether it’s worth making a lump sum withdrawal due to potential extra fees and limits. She’d also need to plan ahead, as it could take a few days before she could get her hands on her money.
At the end of the day, it’s important to understand that the above are only sample scenarios. How it all plays out could vary depending on the loan, interest rate, as well as repayment and spending behaviours.
You could also give our extra repayments calculator a whirl to see how additional payments could impact your home loan. Spoiler alert: it’s likely for the better!
Before locking in your home loan …
Whether you’re getting your first home loan or refinancing your current one, it’s smart to look for ways to save on home loan interest. It’s always a good idea to speak to a qualified mortgage broker or lending specialist to discuss the options for your situation. Savvy homeowners also take the time to explore and understand the options available in the market. Comparing lenders with the features you’re after is a smart move.
At iSelect, we can help you find and compare home loan options. Start a comparison among a range of lenders today.
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