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Offset vs Redraw: What you need to know

If you have some spare cash to put towards your home loan, then an offset account or redraw facility could help you save on interest and pay off your home loan sooner. Let’s break down how they work and the differences and benefits of each.

Offset accounts and redraw facilities are similar in that they both use any extra cash you might have to reduce the interest on your mortgage, while allowing the flexibility to access your money.

 

Whether you choose to use one or both, how you make the most of your home loan features depends on your financial and personal circumstances.

 

While the main difference is in how you access your funds, let’s take a closer look at each, so you can find out what might be right for you.

What is a redraw facility?

A redraw facility is a home loan feature that lets you make extra repayments into your mortgage to help you pay it off sooner, while still giving you the flexibility to withdraw that money if you want to. The extra repayments go towards paying down your loan principal and if left untouched, can reduce the amount of interest you pay on your home loan. At Westpac, redraw facilities come with most loan types that we offer. Take a look at our home loan comparison tool here.

 

If you’ve been making extra payments and find yourself in a situation where you need to access those funds - say you want to renovate or have an unexpected expense - the redraw facility allows you to withdraw it. Unlike an offset account, you would need to transfer all or part of your redraw facility to a transaction account (via online banking, a branch or over the phone) before you can use it. Once the funds are out of the redraw facility, the interest-saving benefit of that amount is gone.

 

There are some limitations to be aware of, however, and it’s best to speak to your lender about the terms and conditions, as well as any restrictions or fees you may be charged.

 

For example, some lenders may set limits on the number of withdrawals you can make per year or month, or specify times when no withdrawals can be made. If you have a fixed rate home loan, you might only be able to redraw available funds up to the prepayment threshold. This is the amount your lender allows you to prepay during the fixed rate period without incurring prepayment break costs.

What is an offset account?

While a redraw facility is a feature attached to a home loan, an offset account is a transaction account linked to a home loan. At Westpac, offset accounts are only available with selected loans and you have to apply for it.

 

Similar to a redraw facility, the money in your offset account ‘offsets’ against the balance of your home loan, which means interest is only charged against this reduced amount, rather than the full outstanding home loan balance. Every dollar in your offset account goes towards reducing the interest you pay, for as long as it is in the account.

 

For example - let’s say you have $400,000 remaining on your home loan and have $50,000 in your offset account. You’ll only be charged interest on $350,000, instead of the full $400,000 - which can be a significant saving on interest.

 

The thing that sets an offset account apart is it allows unlimited access to your funds – including deposits and withdrawals just like a regular transaction account. You can withdraw money directly from your offset account via debit card, ATM, branches, online and phone banking. This kind of flexibility can allow for more immediate benefits and interest-savings, compared to a redraw facility where you have to make extra repayments into the loan to get the benefits, and transfer the money into a transaction account to use it.

 

For this reason, many people like to use their offset account as a savings account, as while you don’t earn interest on your money, you do save on paying interest. Given home loan interest rates are often higher than savings interest rates, this can equate to a bigger saving in the long run. It is worth keeping in mind that home loans with offset accounts may have slightly higher interest rates and fees, so make sure you read the terms and conditions.

 

Which is better for you?

To determine whether a redraw facility or offset account is better for you, it’s important to consider how you’d like to use these features.

 

Some people prefer a redraw facility as having to transfer your money out may slightly less tempt to spend your extra cash, helping you to focus on paying off your home faster. However, if you value flexibility and unlimited access, then you may be more inclined to use an offset account. Although you may not have to choose between the two, as some lenders like Westpac allow borrowers to use both home loan features simultaneously.

 

It’s also important to understand that your mortgage repayments will automatically be paid out of your redraw facility if there is sufficient funds in there, not your nominated transaction account. Only when there’s insufficient funds in the redraw facility will your mortgage repayments be taken out of your transaction account. This can be helpful to know if you’re wondering why your redraw facility isn’t growing as fast as you thought it might. If it’s not continually added to, your redraw facility will be gradually reduced by your regular home loan repayments. So it’s a good idea to check your account regularly to make sure you’re aware of where your repayments are up to.

 

If you’re an investor or are considering renting out your home in the future, it's also important to know that redraw facilities and offset accounts can have different tax implications, so seek professional advice if you’re thinking about this.

 

Before making the decision to use either an offset account or redraw facility, it’s a good idea to speak to your home finance manager to help weigh up all the options and decide what’s best for you and your financial situation.

 

Have any other questions? Call us on 131 900, learn more about the redraw facility or offset accounts, or visit any branch across Australia to talk to your local Home Finance Manager.

Things you should know

This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice. Credit provided Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.