Offset account vs redraw facility: Which one is better?

When shopping for a home loan, the ability to deposit and withdraw funds is highly sought after. So, when looking at features like an offset account and redraw facility, they will probably rank pretty high on your wishlist. 

However, some might be wondering, what are the differences between the two? And could you benefit more from choosing one over the other?

An offset account functions like a transaction account where you can withdraw and deposit money whenever you like. However, instead of being paid interest like a savings account, you’ll be reducing the amount of interest you’re going to be paying on your actual loan.

So how does this work? Basically, any money you hold in an offset account will be subtracted from the loan balance on which interest is charged. That means if you owe $500,000 on your mortgage and have $50,000 in an offset account, you’ll only pay interest on $450,000.

The more you have in your offset account, the more you’ll save on your loan. For this reason, many borrowers choose to automate the process by having their salary deposited into their offset account directly.

• Reduces the total interest paid and the life of the loan
  

• You can access the money in an offset account at any time
  

• Can be used for everyday expenses
  

The main benefit of an offset account is the money you stand to save. So long as you’re disciplined enough to make regular deposits without constantly needing to retrieve them, you can shave thousands of dollars off your total interest payments.

But borrowers might also appreciate the flexibility of having what’s essentially a transaction account linked to their home loan.

You’ll be able to set up direct debit payments, arrange to have your salary deposited straight into the account, and access your money at any time with no restrictions (either with the debit card provided, at an ATM, or via online banking).

It can also double as an emergency savings fund, working in the background to help reduce your interest while ensuring you have enough to cover any sudden and unavoidable expenses that pop up over the life of the loan.

Alternatively, if you’re saving for a long term goal, it’s a good way of offsetting some interest for a while as you save cash in your offset account. This way, you can enjoy whatever you’re saving for (such as a holiday or car) knowing that you also saved yourself from higher interest repayments.

On home loans that allow extra repayments, a redraw facility is a feature that lets you retrieve any funds you’ve contributed above the minimum amount required by your bank.

For example, say your minimum monthly repayments are set to $2,000 but you decide to pay $2,500 instead. If you keep this up over two years, you’ll have made $12,000 in extra repayments. You can then redraw this amount to use as you wish.

Depending on your lender, a fee might apply each time you redraw. Some might also have rules around how much or how often you can redraw in a given period, so you won’t be able to use this feature to cover daily expenses.

• Reduces the principal of the loan
  

• Reduces the total interest paid and the life of the loan
  

• Good for emergency expenses
  

The ability to dip into your extra repayments can come in handy if an urgent expense comes up and you don’t have enough funds on hand to cover it. You might also use a redraw feature to make big-ticket purchases, such as a car or renovations for the house.

Ultimately, both provide the same benefit to homebuyers — helping reduce overall interest charges — but there are a few areas where an offset account trumps a redraw facility. 

For one, you’ll be able to access your funds as easily as you might with a regular transaction account. You’ll even be provided with a debit card to make purchases and withdrawals. With a redraw facility, your money won’t be as readily available.

You can also deposit all your savings into an offset account, so it’s working to bring down the amount of interest you pay without necessarily handing it over to your lender—in this way your money is working for you, although instead of earning you interest you’re “offsetting” the interest owed on your loan.

When using a redraw facility, you’re technically asking for funds that now belong to the bank, and they can deny your request if they deem it appropriate.

All the extra effort that comes with a redraw facility might be a hassle if you want quick access to cash. But on the other hand, it can act as a deterrent from dipping into your loan contributions too much, which might assist those trying to be less impulsive with their money.

If you’re looking for your new home loan with a bunch of these handy features, check out our home loans page. At Mozo, our database lets you compare home loans so that you can get the mortgage that works well for you.