When managing your home loan, two features often come up that can help you save on interest and provide flexibility with your money: Offset Accounts and Redraw Facilities. While both can reduce the interest you pay on your loan, they work quite differently. Here’s a clear breakdown to help you understand these valuable tools and how they might fit your financial situation.
What is an Offset Account?
An offset account is a transaction account linked to your home loan. The money you deposit into this account directly reduces the balance on which your home loan interest is calculated. For example, if your loan balance is $400,000 and you have $50,000 in your offset account, you will only be charged interest on $350,000.
Key Features of Offset Accounts:
- Everyday access: You can deposit and withdraw money anytime, just like a regular transaction account.
- Interest reduction: The money in your offset account reduces the interest payable on your loan.
- No impact on loan balance: Your official loan balance remains the same, but interest is calculated on the loan balance minus the offset balance.
- Possible fees: Some lenders offer offset accounts for free, while others may charge a monthly fee. It’s important to check this when selecting a loan.
What is a Redraw Facility?
A redraw facility allows you to access any extra repayments you’ve made on your home loan beyond the minimum required repayments. Essentially, it’s a way to withdraw funds you’ve previously paid ahead on your mortgage.
Key Features of Redraw Facilities:
- Access to extra repayments: You can withdraw additional payments made to your loan if you need cash.
- Reduces loan balance: When you make extra repayments, your loan balance decreases, lowering the interest charged.
- Restrictions may apply: Some lenders don’t allow redraw during fixed rate periods or construction phases.
- May have fees: Depending on the lender, there could be fees or limits on redraw amounts.
| Feature | ||
|---|---|---|
|
Access to funds |
Immediate, anytime access like a bank account |
Access to extra repayments only, may have delays or restrictions |
|
Impact on loan balance |
Loan balance stays the same; interest calculated on reduced balance |
Loan balance reduces with extra repayments |
|
Account type |
A feature of the loan itself |
A linked transaction account (sub account) |
|
Availability |
Often available on variable and fixed loans |
Usually only on variable loans; limited during fixed terms |
Which One is Right for You?
Choosing between an offset account and a redraw facility depends on your financial habits and needs:
- If you want easy access to your savings with flexibility to spend or save, an offset account might suit you.
- If you prefer to make extra repayments to reduce your loan faster but still want the option to withdraw some funds later, a redraw facility could be the better choice.
- Some borrowers even use both features together to maximise interest savings and flexibility.
Disclaimer: Lender eligibility criteria applies. This information is general in nature and does not constitute financial advice. Borrowers should seek personalised advice based on their individual circumstances.