Financial Focus: Offset versus Redraw

As Finance Brokers a common question that we are regularly asked is “What is the difference between an offset and redraw facilities?” While both are common home loan features, they can cause some confusion to the client when considering the best type of features for their prospective home loan. And with more and more lenders offering either an offset account or a redraw facility consumers need to gain a better understanding of these features.

An offset account is a transaction account which is linked to your home loan and which has normal transaction account functionality. The benefit is that the money in your account is offset daily against your home loan balance, and this will reduce the mortgage interest charged accordingly.  While a redraw facility is a feature which enables borrowers to contribute extra payments onto their mortgage and then allows them to access to their banked additional funds. So while you are saving you are also reducing the interest you pay on your home loan.

In many ways, redraw and offset facilities are quite similar. The main difference is that the money sitting in an offset account remains at call and easily accessible, whereas the money in a redraw facility, while accessible, isn’t available for same day, at call withdrawal.

While diligent savers will benefit from either kind of loan feature, it’s important to note that redraw facilities and mortgage offset accounts are better suited for different kinds of mortgage holders. You have to decide for yourself if you want to do one of two things:

1. Reduce the interest on your loan while maintaining day-to-day access of your cash. A mortgage offset account offsets the interest owing on your account, but enables you to have day-to-day access to the cash. A mortgage offset account can be used in a transactional way, so is ideally suited for home owners who want to minimise the interest owing on their repayments, without necessarily paying extra off their principal. Many lenders are now offering multiple offset accounts which enables you to separate your savings such as to long term bills, holidays, education or however you like to separate your money for budgeting purposes.
2.  Pay off the loan itself (known as the principal). By paying the money directly into the loan, a redraw facility allows you to make payments towards paying off the principal, rather than simply reducing interest in the short-term interest. This is better suited for those who have a focus on paying off their mortgage earlier. Though the amount you can redraw will be assessed each year to ensure that you still pay off your home loan within the loan term.

In summary offset accounts are like everyday transaction accounts, giving you easy access to your money, while redraw facilities let you access extra repayments that you have made on your home loan. Both facilities can help reduce the amount of interest you pay on your home loan, however it is important to consider how you wish to manage your finances.