Redraw vs Home Loan Offset Account

When you take out a home loan there are a few options you can choose to make repayments more manageable. However, choosing a financial institution and interest rates aren't the only things you need to consider. It’s also important to look for eligible home loan options which can reduce your interest repayments and give you flexibility to pay off your home loan sooner.

Below we’ve explained what an offset account is and how a redraw works to help you consider your options when the time comes to select the right product to meet your individual needs.

How does an offset account work with a home loan?

A mortgage offset account is an every day savings account that is linked to your home loan. You can make deposits or withdraw money from it as you would with a regular transaction account. However, because it is linked to your home loan account, the balance you have in this account will offset the amount you owe on your home loan. As a result, it reduce the interest you pay on the loan amount.

This facility can be a great way to save money on your home loan, as the interest you pay is based on the home loan balance less the amount held in your linked account. For example: if you have a $500,000 home loan and you have $20,000 in your linked savings account, you will only be charged interest on $480,000.

Each month your regular home loan repayments will still be the same, but more of your repayment will go towards paying off the principal rather than paying the interest owed to the bank. You will pay off your loan faster with less interest, while having the ability to withdraw the funds you have in your transaction accounts.

Things to Consider

• You should be careful as some offset accounts don’t count 100% of the funds held in your linked account - some may only count 80% or less.
• The amount of money that is required to open the account - Some lenders require a minimum balance that you need to maintain in your account, so this is something to consider if you do not have a lot of savings to put into the account.
• Ongoing fees - There may be monthly or annual fees associated with opening and maintaining an offset account, so it is important to know what these are.
• Check the interest rate on the loan - Some lender may charge a higher variable interest rate for these types of home loans.
• Also check the comparison rates - The comparison rate takes into consideration the base interest rate, the application fee, any set up fees and the ongoing fees and charges. This rate gives you a more comprehensive understanding of what your loan will actually cost.

Tools and calculators

Have a play with our home loan offset calculator to see how much you could save over the term of your home loan.

How does a home loan redraw work?

A redraw facility is a feature that allows you to access the extra funds you have paid into your eligible home loan. This can be helpful if you have made additional repayments and then suddenly find yourself in need of some extra cash.

It is important to note that you will only be able to access the money you have over and above your minimum repayments, so it is not a way to get access to additional funds if you are struggling to make your repayments.

A redraw facility is not a separate account.

The additional funds you pay sit within your home loan account. The way redraw works is simple: if your monthly repayments are $1500 and you pay $1700, you will have an additional $200 sitting in your account shown as your available redraw balance.

Making extra repayments in your redraw essentially contributes to saving time and money on your home loan term. If you can make unlimited additional repayments and you can redraw money without fees this can potentially be a better cost savings option.

How do I withdraw my extra repayments?

Redraw facilities are a little more difficult to access. You don’t have a debit card like you would for your offset account, and you may not have access via online banking.

Depending on your lender there may also be a minimum redraw amount or limit on how often you can redraw. This may work to your advantage though – the harder it is to withdraw, the easier it is to save.

Always be Prepared!

You may not be planning on accessing additional funds from your home loan. However, we always recommend that, where possible, you pay a little extra with your regular repayments. If you have a variable rate loan, making additional repayments can prepare you for future interest rate changes or unexpected changes in your financial circumstances.

Things to consider

• Consider ongoing fees - Some lenders may charge redraw fees each time you make a withdrawal from your account
• Your redraw facility may also have restrictions on the number of redraws you’re able to make.
• It’s important to look into the fees and charges before accessing your funds and consider the comparison rate for your loan product.

Eligible Home Loans

With the recent interest rate rises, many home owners have opted to move their home loans from a variable rate to a fixed rate loan. Fixed rate home loans can give you security when it comes to your household budget, however, many lenders will not allow you to make additional repayments.

Features such as redraw facilities and offset are often only available with a variable rate. Early repayment fees may also charged if you pay out your loan or make additional repayments within the fixed interest rate period.

How do I decide on the best deal for my financial circumstances?

While these two home loan features fundamentally have the same concept, there are pros and cons to each. Depending on your financial situation there is normally one that may benefit your circumstance more.

Everyone has their own individual saving and spending habits, so it’s important to make sure you’re using them to their full potential. It’s also important to consider the tax implications with each option if you have an investment property.

Let us deal with your home loan application.

Whether you are just starting out on your home buying journey or you are looking to refinance your existing home loan, it's important to recognise that there is more to consider than current interest rates.

By working with one of our experienced mortgage brokers, we will take the time to get to know you and find a deal to suit your financial circumstances. Contact us for a chat today!