Offset vs Redraw Account

What Are Offset and Redraw Accounts?

An Offset and Redraw account are features linked to your home loan that allow you to reduce the interest you pay. While both accounts work toward the same goal, they function in distinct ways:

• Offset Account: This is a separate bank account that’s linked to your home loan. Any funds in this account reduce the interest you pay on your mortgage.
• Redraw Account: This is part of your home loan that allows you to make extra payments into your loan and withdraw them later if needed.

How Do They Work?

Offset Account – Like a Discount on Interest

Imagine you have a home loan of $1,000,000 and also have $500,000 in an Offset account.

• Normally, you’d be charged interest on the full $1,000,000 loan.
• But because of the $500,000 in your Offset account, the bank only charges interest on the remaining $500,000.
• This setup helps you pay less interest, so you can pay off your loan faster.

An Offset account works like a regular bank account, where you can deposit and withdraw money at any time. The more money you keep in it, the more interest you save.

Redraw Account – Extra Payments You Can Take Back

A Redraw account is part of your home loan, not a separate bank account. You can make extra repayments on your loan, and if you need the funds later, you can withdraw them.

For example:

• You take out a $1,000,000 home loan.
• You make an extra $500,000 payment towards your loan.
• Your new loan balance is now $500,000 instead of $1,000,000.
• If needed, you can redraw up to $500,000.

The more extra payments you make, the less interest you pay over time. However, some banks limit the frequency of redraws or charge fees for using this feature.

Which One Should You Choose?

Offset Account – Best if:

• You consistently keep a good amount of savings in your account.
• You want to reduce interest on your loan but still have easy access to your money.
• You’re a property investor or using an interest-only loan.

Redraw Account – Best if:

• You don’t always have extra funds available, but when you do, you want to put them into your loan.
• You don’t need immediate access to the funds, but want the option to access them later.
• You’re focused on paying down your mortgage faster and don’t mind restrictions on withdrawals.

What About Costs?

• Offset Accounts: These often come with monthly or yearly fees, and the interest rate might be slightly higher than that of a basic home loan. However, many people find that the interest savings more than make up for the fees.
• Redraw Accounts: Generally, there are no extra fees for these accounts, and the interest rate may be lower. But be aware that some lenders charge fees for withdrawing money or limit how often you can access the funds.

Final Thoughts

Both Offset and Redraw accounts can help you save on interest, but they suit different types of borrowers.

• If you want quick access to your funds while reducing interest, an Offset account is a solid choice.
• If you’re focused on paying down your mortgage but still want the option to access funds later, a Redraw account might be more suitable.

Still not sure which option is best for your home loan? Contact HFinance for expert advice tailored to your financial needs.