Redraw vs Offset: what’s the difference?

What you’ll learn about consolidating debt

• How offset and redraw work
• The main differences between redraw and offset
• How redraw and offset could reduce home loan interest
• Redraw v offset – which is better?
• What’s the difference between a redraw account and a line of credit?

 

How offset and redraw work

Redraw facilities and an offset account are two home loan features that serve similar purposes. Both give you way to use spare funds to reduce interest charges on your loan balance – but it’s important to understand the differences before you choose one or the other.
 

REDRAW –  A redraw facility gives you the ability to make extra repayments in addition to your minimum fortnightly or monthly home loan repayment. These additional funds can be taken out – or redrawn – if you need them for renovations or to cover an unexpected expense, for example.
 

The money in your redraw facility counts against the balance of your home loan, which lessens the amount of interest you pay. It’s effectively a pool of funds comprising your extra repayments that sits in your home loan account on top of the balance. Keep in mind that these extra funds kept on your loan balance will reduce with regular repayments over time.
 

OFFSET – An offset account, on the other hand, is a separate transaction account that’s linked to your home loan. You can use it as your everyday bank account, with easy access to your funds and the ability to make deposits and withdrawals whenever you want to. It also gives you the benefit of potentially reducing interest payable on your home loan.
 

Any money you have in your account is ‘offset‘ against the balance of your home loan, meaning you only pay interest on your home loan balance minus the balance of your offset account. As interest is calculated daily and charged monthly, the more money you keep in your offset, the less you pay in interest. But that also means that as your balance rises and falls, so does the amount it can reduce the interest on your home loan.
 

At Westpac, redraw facilities are available with most variable rate loan types that we offer. Offset accounts are only available on our Rocket Repay home loans.
 

Both options – or even a combination of the two – can save you paying interest and even help you pay off your home loan faster.
 

Which is best for you depends on your personal circumstances, how you like to manage your money and your current financial situation. Plus, any extra interest or fees you may need to pay for using either one.

 

The main differences between redraw and offset

The main difference with an offset is that the funds are kept in a separate transaction account that’s linked to your home loan. Offset funds are also not diminished by regular repayments, as with redraw. Redraw allows you to make extra repayments to your home loan account and take them out again if you need to. Here’s a simple comparison of the main features of both:
 

Redraw	Offset
Balance in redraw comes from the extra repayment you have made.	Offset account works just like your everyday bank account. You can nominate the account to receive your salary, or any other regular payments.
Funds in your redraw facility created by extra repayments reduce the interest amount on your home loan.	Money in your account offsets against the balance of your home loan, reducing the interest charged.
Easy access to your funds via transfer to your transaction account.	Instant access to your day-to-day funds. Pay bills and credit card debt, withdraw cash at an ATM, use a debit card.
A redraw facility is a feature attached to most Westpac home loan options. You will need to set up redraw, if you didn’t already do it when you applied for the loan.	An offset account is only available on some home loans.
You can increase the balance in your redraw facility by making extra repayments manually using direct debit.	You can pay your salary into an offset account to get the benefit of your income reducing interest.
Restricts your access, so it’s good if you are saving for something specific, like home renovations.	Unlimited access to your funds.

 

 

Learn more about how a redraw facility or offset account can help you manage your money.

 

 

How redraw and offset reduce home loan interest

Offset accounts and redraw facilities allow you to lower home loan repayments and interest charges in the same way. Both reduce the amount of your home loan balance that you’re charged interest on.

 

Making extra repayments to your home loan account or putting additional funds into an offset account will count against the outstanding balance that your bank uses to calculate interest on your home loan. Interest is usually calculated on your outstanding home loan balance each day, and then charged monthly. This means that keeping additional funds in either an offset account or redraw facility for even one day is going to save you interest charges.

 

 

Redraw v offset – which is better?

A redraw facility and an offset account both have their merits, so it’s not really a case of better, but more what suits your financial circumstances. It also depends on what type of loan you have – offset, for example, is not available on all home loans, whereas redraw is (provided you activate it).

 

If you’re consistently able to make payments above the minimum for your home loan and may have the occasional lump of cash to put away – then a redraw may fit your purposes. You can withdraw the money held in your redraw facility at any time you wish – but that will mean you will reduce the benefit of paying less interest on your home loan.

 

If you need instant access and the convenience of your salary and bills coming in and out of the same bank account, then an offset account may be the answer. However, home loans with offset may have slightly higher interest and fees.

 

There are some potential tax differences^* between the two options. If you want to to use your home as an investment property and rent it out, interest charged on your home loan may be tax deductible.

 

Using your offset account won’t affect the tax deductibility of interest charged on your loan. But, with a redraw facility, you might not be able to claim for any money you’ve taken out for things like a new car or a holiday. Talk to the Australian Tax Office to clarify any questions, or your accountant for details about your personal tax situation.

 

You may not have to choose between the two. Some home loan providers, like Westpac, allow you to have a redraw facility and an offset account on eligible loans, so you can enjoy the best of both worlds.

 

In all cases we recommend that you request a call back to talk to one of our experts or another trusted financial advisor before making any binding decisions.

 

What’s the difference between a redraw account and a line of credit?

Whilst these two options are sometimes considered together as ways to help homeowners manage their money and get access to funds, they fulfil completely different purposes.

 

A redraw facility is a feature that can be included in your home loan. It can help you reduce interest payments and pay off your loan sooner.

 

A line of credit is a flexible loan that charges you interest on the amount you’ve borrowed. You can access extra money on your line of credit whenever you want (up to your credit limit) for just about anything – from a holiday to a home reno project, or even a new car. It’s more flexible than fixed-term loans, as you use it as-and-when you need to, without the need to reapply. You also only pay interest on the amount you’ve borrowed, not your entire credit limit. 

 

While we no longer offer a line of credit loan, if you already have a home loan with Westpac and there’s equity in your home, you may be able to use it to borrow in a similar way via a home loan increase.

 

This can be convenient if you like the flexibility of having extra cash to hand. While every loan is different, using your equity may also give you a way to set up a line of credit using a home loan rate while avoiding the higher interest rate that may come with a secured or unsecured personal loan.

 

To sum up

• An offset account gives you easy access to your money and works like an everyday transaction account.
• A redraw facility let you access any extra home loan repayments that you’ve made.
• Both help reduce the amount of interest payable on your home loan.
• If you decide to rent out your home, there may be different tax implications for offset and redraw.
• How you use either option depends on your personal financial circumstances and how you prefer to manage your money.
• Speak to your bank or a trusted financial advisor to help decide what’s right for you.

 

Next steps

Before making the decision to use either an offset account or redraw facility – or both – it’s a good idea to speak to your lender. They can help you weigh up all the options, so you can decide what’s best for you.

 

If you have other questions, request a call back, call us on 131 900, or visit any branch across Australia to talk to a Westpac lender.