What’s the difference between an offset account and a redraw facility?
The main difference between an offset account and a redraw facility is that an offset account is a separate deposit account and a redraw facility is a feature attached to your loan. Both can, however, save you money on interest repayments and reduce your home loan term.
Offset account
An offset account is a savings or transaction account linked to your home loan. The balance in this account ‘offsets’ daily against the balance of your home loan before interest is calculated which is how you can save money on interest and shorten your home loan term.
Let’s say, for example, you have a home loan balance of $250,000 and $10,000 in your 100% offset account—you will only pay interest on a home loan balance of $240,000. Every dollar in your offset account can save you money because interest is accrued daily. That means more of your repayment goes towards paying down the principal, enabling you to pay off your home loan faster.
Types of offset accounts available
100% offset account
All of the funds in your offset account are applied against your home loan balance before interest is calculated.
Partial Interest offset account
A partial offset gives you a reduced interest rate on the part of your home loan equal to the balance of your offset account. This is not as effective as a 100% offset account.
Benefits of an offset account
Your money is easily accessible
You can use your offset account to withdraw, transfer and access your money, just like an everyday transaction account.
Simple to manage
Simply deposit your salary and any other income into your offset account and have an immediate affect on the amount of interest you pay, as the interest on your home loan is calculated daily. Some lenders offer multiple offset accounts linked to your home loan, so you can manage your finances while still benefiting from interest savings on your home loan. This can be a great way to save for big expenses such as a holiday or a new car while still saving on home loan interest
Tax advantages
An offset account can be more beneficial than a savings account as the interest you may earn on a savings account is less than the interest incurred on a home loan. Additionally, there will be no tax on the interest you earn and you’ll be building valuable equity on your property.
Things to consider
- There are many kinds of offset accounts, and the features will differ depending on the loan type and lender. As discussed, some offset accounts are only partial, and fixed rate home loans may have set terms and conditions on 100% offset accounts.
- Offset accounts usually form part of a home loan package along with lower interest rates and other product discounts. Home loan packages typically include an annual fee but could still help you save money. Make sure you look at the total charges associated with any home loan package to determine whether it will leave you better off financially.
- Some lenders may require you to keep a minimum balance in the offset account.
Redraw facility
A redraw facility is a loan feature usually available with variable rate home loans and some fixed rate loans. It lets you access any extra repayments you’ve made on your home loan.
To use a redraw facility, you first need to make extra repayments or regularly pay more money on top of your minimum loan repayment amount. Use our handy calculators to find out how much interest you could save by making more than your minimum loan repayments.
How a redraw facility works
If your minimum monthly repayment is $700 and you pay $900 for a period of 12 months, you will have paid an extra $2,400 into your home loan. A redraw facility would allow you to access the extra $2,400 you have paid.
Benefits of a redraw facility
Helps you save
A redraw facility can be an excellent savings tool. It is particularly useful if you don’t require regular or immediate access to your funds, but rather want to use it as an emergency fund for unexpected expenses.
Earns good interest
Any excess funds put into your home loan earn the same interest rate that is charged on your home loan. By comparison, savings accounts generally pay much lower interest rates.
Tax advantages
There may potentially be tax advantages when using a redraw facility. Interest earned on your savings account is considered income and may be taxable, whereas any interest that is saved on your home loan by having money in a redraw facility will not be subject to tax.
Things to consider
Redraw facilities may incur a fee
- While some lenders may offer unlimited free redraws others, may only offer a few free redraws per year. Once the limit of free redraws is exceeded the lender might charge a fee for each additional redraw.
- Some lenders may charge a flat fee for having a redraw facility. This is known as an activation fee. Once the redraw facility is activated, you can use the redraw facility as often as you like.
- Some lenders may impose a fee for each redraw. This fee will vary between lenders and loans.
Restrictions on the amount you can redraw
Some products have a minimum and maximum amount which can be withdrawn at any one time which may fall outside the amount you want to redraw.
Redraw versus offset
Choosing between an offset account and a redraw facility on your home loan will depend on how accessible you need your money to be. You should also consider any associated bank fees with each facility.
Speak with an emoney lending specialist who will help you weigh up the pros and cons carefully to decide whether an offset account or redraw facility is right for your situation.
We recommend you seek independent financial advice prior to making any decisions that could affect your financial security.
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