Offset account vs redraw: what is the difference?

1. Offset account vs redraw: what is the difference?

Offset accounts and redraw facilities can both help reduce home loan interest, but they work differently.

The best arrangement will depend on the loan, fees, account balance, access requirements and whether the property is your home or an investment.

What is an offset account?

An offset account is a transaction account linked to a home loan.

The lender generally calculates interest on the loan balance less the eligible offset balance.

For example, if your home loan balance is $500,000 and the eligible offset account contains $40,000, interest may be calculated on $460,000.

The offset balance does not usually reduce the legal loan balance. It reduces the amount on which interest is calculated.

Moneysmart notes that an offset account can reduce home loan interest, but borrowers should compare the potential saving with account and package fees.

What is redraw?

Redraw generally allows access to eligible additional repayments previously made into the loan.

If your required repayment is $3,000 and you pay $4,000, the extra $1,000 may become available for redraw, subject to the lender’s rules.

Additional repayments reduce the loan balance. Redrawing increases the balance again.

Key differences

Ownership and control

Money in an offset account remains in a separate bank account.

Money available through redraw has been paid into the loan. Access is subject to the loan terms and lender rules.

Access

Offset funds can generally be accessed through normal transaction account facilities.

Redraw may have:

• minimum withdrawal amounts
• daily limits
• transaction restrictions
• fees
• delays
• restrictions during a fixed-rate period.

Fees and rates

Loans with offset accounts may attract an annual package fee or a higher rate.

A basic loan with redraw may have lower fees. The right comparison depends on the expected offset balance and how consistently it will be maintained.

Interest effect

A genuine 100% offset and an equivalent additional repayment can produce a similar interest calculation while the balances remain in place.

However, account structure, fees, access and taxation consequences may be different.

Investment-property taxation considerations

Using redraw from an investment loan for private expenses can create a mixed-purpose loan.

Interest deductibility generally depends on the use of the borrowed funds, not simply the property securing the loan. This can make record keeping and apportionment more complicated.

Keeping private funds in an offset account may provide greater flexibility than paying them directly into an investment loan and later redrawing them. This is a taxation issue and should be discussed with a registered tax adviser.

Do not restructure investment debt solely on general online information.

Is an offset account worth the fee?

Consider:

• average expected balance
• interest rate
• annual package fee
• whether the offset is 100% or partial
• number of available offset accounts
• whether all accounts are linked correctly
• how often funds will be withdrawn.

A large and consistent balance may produce meaningful interest savings. A small or irregular balance may not justify a higher rate or annual fee.

Questions to ask

• Is the offset 100%?
• Which loan split is it linked to?
• Does the account earn interest or only offset loan interest?
• Are there package or account fees?
• Are redraw funds guaranteed to be available?
• Are there fixed-loan restrictions?
• What happens if the lender changes the product?

Compare the complete loan

Call to action: A finweb mortgage broker can compare offset and redraw home loans, including rates, fees and how the features may work with your intended loan structure.

*General information only. Obtain independent taxation advice before using or restructuring loans connected with an investment property.*