Offset Account vs Redraw Facility: Which is Right for Your Australian Home Loan?

What is an Offset Account?

An offset account is a transaction account linked to your home loan. The balance in this account offsets the amount you owe on your mortgage. For example, if you have a loan of $500,000 and an offset account balance of $50,000, you only pay interest on $450,000. This can significantly reduce the interest paid over the life of your loan and help you pay it off sooner.

What is a Redraw Facility?

A redraw facility allows you to withdraw any extra payments you’ve made on your mortgage. If you’ve been diligent in making additional repayments to reduce your principal and suddenly need funds, the redraw facility provides access to this money. While this can be a flexible feature, it’s important to understand the conditions attached, such as fees or minimum redraw amounts.

Key Differences Between Offset Accounts and Redraw Facilities

Accessibility and Flexibility

Offset accounts typically offer greater accessibility and flexibility as they function just like a regular transaction account. You can deposit or withdraw funds at any time without fees, making it ideal for everyday use. On the other hand, a redraw facility might have restrictions such as withdrawal limits or fees, depending on your lender.

Interest Savings Potential

Both options can lead to significant interest savings. However, an offset account offers ongoing interest reductions as long as there’s a balance in the account. Redraw facilities require proactive additional payments, and the savings depend on how much extra you pay and how long it remains in the account.

Impact on Loan Repayment

With an offset account, any funds deposited are immediately reducing the interest payable. This can lead to faster loan repayment if managed diligently. Redraw facilities also aid in faster repayment but require the borrower to actively make additional repayments first.

Practical Tips and Advice

• Evaluate Your Financial Habits: If you frequently dip into savings, an offset account provides easier access to your funds. For disciplined savers, a redraw facility might encourage you to keep extra funds as part of your mortgage.
• Consider Fee Structures: Some lenders might charge account-keeping fees for offset accounts or redraw fees. Ensure you factor these into your decision.
• Plan for Emergencies: An offset account provides immediate access to funds, which can be crucial in emergencies. Ensure your loan product aligns with your financial safety net needs.

Common Mistakes to Avoid

• Ignoring Terms and Conditions: Always check the lender’s terms for redraw facilities, as some might impose limits or fees that could counteract your savings.
• Not Utilising Features Fully: Ensure you understand how to maximise the benefits of your chosen facility. For example, consistently keeping a high balance in your offset account can lead to substantial savings.
• Overlooking Tax Implications: While the interest saved on a mortgage is not taxable, the funds in an offset account do not earn interest, which might affect your tax strategy.

How Esteb and Co Can Help

Navigating the complexities of home loans can be daunting, but Esteb and Co is here to assist. Our team of experienced mortgage brokers can offer tailored advice on whether an offset account or redraw facility suits your financial goals. We work closely with a variety of lenders, ensuring you access the most competitive and suitable mortgage products available in the market.