What is the difference between an offset account and redraw on a home loan?
4 min read
There are lots of different features on home loans that borrowers can access, two of these features include an offset account and a redraw facility.
What is an offset account?
Put simple, an offset account is an everyday transaction account which allows you to reduce the amount of interest you are charged on your home loan. It works as a transaction account that you can deposit or redraw from at any time, but is linked to your home loan.
The interest charged on your home loan is calculated on your loan balance minus the balance in your offset account. For example:
- You owe $300,000 on your home loan
- You have $50,000 in your offset account
- The lender will charge interest on the balance of $250,000
This means the higher the balance of your offset, the less interest you’ll pay on your home loan (this scenario assumes you have a 100% offset account – an important detail).
What is a redraw facility?
A redraw facility is different to an offset. When you make extra repayments on your home loan above the minimum required, you are essentially ahead of your loan repayments. Some lenders will then back this extra balance available to you to redraw.
A redraw is a feature that allows you to take back extra payments that you’ve made on your loan. If you are ahead of your loan repayments, the balance of your loan is lower and you will be charged less interest accordingly. If you only make the minimum repayment each month then you won’t have anything available to redraw.
Something else to note is that lenders are in control of how much you can redraw and may set limits or reduce redraw options available. A few years’ back one lender came under fire when they absorbed all redraw balances on all the home loans on their book, loan balances were reduced accordingly but the redraw facility dropped to zero.
How do they differ?
An offset account is a separate banking account you need to open (and potentially pay fees on), which allows you to deposit and redraw funds at any time.
A redraw is a feature on a home loan that lets you effectively increase your loan balance (up to a limit) if you have made extra repayments on the loan.
You can’t use funds on your redraw via your debit card and will reduce in availability over time as it’s calculated based on the loan amount, repayments that should have been made and the term of the loan.
Which is the best option for me?
We always suggest speaking with a broker or lender about what products and features you need before making a decision regarding your finances and lending options.