Offset or Redraw? Whats the difference?

When it comes to choosing a variable rate home loan it’s important to weigh up the different features and benefits of a mortgage offset account compared to a redraw facility. Both options offer flexibility that can help you save on interest and pay your mortgage off sooner. Let’s dive into the particulars of each option and explore how they can work for you.

Mortgage Offset Account

A mortgage offset account is a savings or transaction account that is linked to your home loan. The balance in this account doesn’t earn interest but it does reduce the balance of your home loan, thus reducing the amount upon which interest is calculated. For example, If you have a home loan of $300,000 and you have $50,000 in your offset account, you will only be charged interest on $250,000. Effectively you’re earning whatever interest rate you are paying on your mortgage as you are saving that interest by having your savings in an offset account (but you don’t pay tax on it this way - yay!).

Some lenders will allow you to link up to 10 different offset accounts to your home loan so if you’re doing Barefoot’s buckets - or if you just like splitting your money into different accounts - this option could be for you. There is usually a small monthly fee for this type of facility, however your broker will give you this information before you decide. Your broker will also clarify whether the offset amount is applied against 100% of the loan, which is usually the case nowadays, or if it’s only applied to part of it.

Redraw Facility

A redraw facility allows you to make additional repayments on your actual home loan which can be withdrawn if needed. The extra contributions that you make towards your loan reduce the outstanding balance in the same way as an offset account, thereby decreasing the interest paid over the life of the loan. The benefit of redraw is that it is fee free.

Both options offer a way to make your savings work harder for you and reduce the interest paid on your mortgage. It’s really a matter of personal preference and how you like to manage your money. As with any financial product please consult with a qualified broker to ensure that you understand all of the available options and associated T&C’s.