What’s the difference?
You’ve worked hard for your money, so it makes sense to put it somewhere that is going to benefit you.
Two choices for people with a home loan can be an offset account and a redraw facility. While they have similar features, there are some differences to understand when deciding the right option for you.
The flexibility of an offset account
An offset account is a transaction-style account linked to your home loan. Any funds deposited into it are ‘offset’ against your loan balance daily, so you only pay interest on the smaller amount.
Let’s say you have a $500,000 mortgage and have accumulated $50,000 in your offset account. You’ll only pay interest on $450,000.
Because offset accounts can be flexible and interest is calculated on a daily basis, they may be a good place to receive your salary. While your salary is sitting in the account offsetting interest, you can use a debit card linked to the account to pay for everyday expenses.
Some people choose to use a rewards-points-earning credit card to pay for their monthly expenses, then pay off the credit card balance each month using the funds in the offset account. While this can mean extra savings in interest, it only works if you’re diligent and able to pay off your credit card balance each month.
There are both pluses and minuses to think through when deciding whether an offset account is right for you. Offset accounts can be a great way to reduce the interest paid on your home loan. These accounts allow you to access your funds at any time to cover unexpected expenses or other costs.
But having a mortgage with an offset account attached may mean you pay a higher interest rate and/or higher fees and charges compared to a mortgage without these features. Also, be aware that if you pay a fixed interest rate, only a few lenders will also offer an offset account with your mortgage.
Making extra repayments with a redraw facility
Rather than being a separate account, a redraw facility allows you to make additional repayments on your home loan, over and above your minimum monthly repayments.
Let’s say you have a $500,000 mortgage and you have deposited $50,000 into your redraw facility. Your mortgage balance will fall to $450,000 and you will only pay interest on this amount. Provided the loan’s conditions are met, you are able to access, or redraw, the $50,000 you have added to your home loan.
In contrast to an offset account, the funds in a redraw facility pay down the loan’s principal amount. So depositing money in a redraw facility instead of an offset account may mean you are less likely to access the funds, so the loan may be repaid sooner.
There are lots of small but significant differences between the redraw facilities offered by lenders.
Some may require a certain number of days’ or weeks’ notice before they will give you access to your funds. Others may let you immediately withdraw funds in a redraw through a banking app.
Like an offset account, loans with a redraw facility may attract higher fees and charges. Also be sure to check the fine print on your loan arrangement, as there may be a limit on the number of times redraws can be made each year, or there may be limits on the minimum or maximum amount that can be redrawn.
Do your thinking
There are lots of things to bear in mind when deciding if an offset account or redraw facility is right for you, including:
- What’s your priority? Are you looking to pay down your principal loan amount as quickly as possible, or use your salary and savings to save you money in interest?
- How often do you want to access your money? Do you need the flexibility of a transaction-style account?
- Can your employer pay your salary into your offset account, and do you have other savings or investments you could deposit into the account to boost its interest-saving potential? Offset accounts often really come into their own the more money you have sitting in the account.
- If you were to leave your salary in an offset account and use a points-earning credit card to pay your expenses, how confident are you in your ability to pay off the balance each month?
- If you plan on renting out your home, it may be better to opt for an offset account. Redrawing advance payments of your loan for personal expenses will reduce the portion of interest that is deductible. It also means you have to track the amount of redraws, so that you can calculate the deductible portion.
- If you are receiving Centrelink payments, how will these be affected? For example, if you are applying for JobSeeker Payment (in which case Centrelink may impose a liquid assets waiting period), an offset account will be counted when calculating the waiting period, however any advance payment available for redraw will not be counted. When applying the asset and income test to the assessment of an income support payment (e.g. Age pension or JobSeeker), Centrelink will count the offset account, however they will not assess the amount available for redraw.
Some lenders may offer the option of both an offset account and a redraw facility. This may suit those who want the best of both worlds – the ability to make large advance payments towards their mortgage, plus the ability to access their funds whenever they want.
Like most money decisions, there is no right or wrong answer. As always, the right choice for you depends on your own personal circumstances and what you’re most comfortable with.
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