Offset accounts vs. redraw facilities: which one should you choose?
Your mortgage isn’t just a loan, it’s a tool. And choosing the right features, like an offset account or redraw facility, can make a big difference to how fast you pay it off, and how much interest you save. But which one fits your financial goals best? Let’s unpack the pros and cons.
What is an offset account?
An offset account is a transaction or savings account that’s linked to your mortgage. The balance in your offset account reduces the loan balance used to calculate interest.
How offset works
- Mortgage balance: $400,000
- Offset account balance: $50,000
- You’ll only be charged interest on $350,000, not the full $400,000.
That’s how you make your money work harder, without lifting a finger.
Advantages of an offset account
1. Interest savings:
Every dollar in your offset account reduces your loan balance, meaning you pay less interest over time. Even small, regular deposits can lead to serious savings
2. Easy access to funds:
You can dip into your offset account any time via debit card, online banking or phone banking, whether it’s for everyday expenses or an unexpected bill
3. Tax benefits:
Unlike investment earnings and savings accounts, the interest you save with an offset account is tax-free, meaning you avoid potential tax implications
4. Flexibility:
Offset accounts let you make regular transactions, set up direct debits and still reduce your mortgage interest. It’s financial multitasking at its finest.
Disadvantages of an offset account
1. Higher fees and charges:
Offset home loans often come with higher interest rates or fees. So it’s worth comparing loan products or using a mortgage calculator to weigh up the benefits
2. Discipline required:
To make it worth it, you need to maintain a decent balance in the offset account. That means resisting the temptation to dip into your savings, requiring budgeting discipline.
What is a redraw facility?
A redraw facility lets you access any extra repayments you’ve made on your home loan. For example, if your required monthly repayments are $2,000 but you’ve been paying $2,500, that extra $500 each month builds up. Down the track, you can request to redraw those funds.
How it works:
- Mortgage balance: $400,000
- Extra repayments made: $20,000
- Interest is calculated on: $380,000
- You can redraw that $20,000 if you need it.
Advantages of a redraw facility
1. Interest savings:
Like an offset account, extra repayments reduce your loan balance, saving you interest
2. Encourages saving:
Because accessing redraw funds usually requires a request, and sometimes a wait, it makes you think twice before spending extra money
3. Lower fees:
Redraw facilities are often available on standard loans with lower fees compared to home loans with offset features.
Disadvantages of a redraw facility
1. Limited access to funds:
Redrawing extra funds isn’t always instant. Some lenders process redraws over a few business days
2. Redraw fees:
Some lenders charge per redraw or have minimum redraw amounts. Always check your loan features and redraw conditions for transaction limits
3. Restrictions:
Lenders may limit how much you can redraw or impose minimum redraw amounts
4. Tax implications (for investment loans):
Using redraws for non-investment purposes from an investment property loan could impact your tax deductions.
Offset vs redraw: which is better for you?
There’s no one-size-fits-all answer. Choosing between an offset account and a redraw facility depends on your financial situation, goals and spending habits.
An offset account might suit you if:
- You want instant access to your funds for emergencies or everyday use
- You regularly deposit savings or income that can maintain a substantial balance
- You like the flexibility of using your account for day-to-day transactions.
A redraw facility might suit you if:
- You want to make additional loan repayments and save on interest
- You want to minimise fees and costs
- You don’t need instant access to extra funds and prefer a more disciplined approach to saving.
How MyBudget can help
Whether you’re team offset or team redraw, or just trying to understand the difference, Here’s how MyBudget can help you create a plan that makes the most of your home loan features:
1. Budget planning:
Our money coaches will help you budget for minimum repayments, extra repayments or additional payments, depending on your goals
2. Savings strategies:
We’ll tailor your plan to help you maintain a healthy offset account balance or build extra repayments consistently
3. Personalised support:
Still not sure which option suits you? Our team provides guidance based on your unique financial situation.
With MyBudget, you’ll gain more than just financial clarity, you’ll get a team who’s cheering you on and helping you live life free from money worries.
Take the next step
Want to know how your offset account or redraw facility could impact your loan balance? Try MyBudget’s Home Loan Repayment Calculator to see how much interest you could save.
Or book a free chat with our friendly team and let’s create a personalised budget plan to help you pay down your home loan faster and achieve your financial goals, without the guesswork.