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.
Contact Carrick Aland’s award-winning Wealth Planning team on 1300 466 998 or visit carrickaland.com.au/wealth-planning/.
This report is prepared by Bridges Financial Services Pty Limited ABN 60 003 474 977 AFSL 240837 (Bridges). Bridges is an ASX Market Participant and part of the IOOF group of companies. This report is prepared by the IOOF Research team for: Bridges Financial Services Pty Limited ABN 60 003 474 977 AFSL 240837, Consultum Financial Advisers Pty Ltd ABN 65 006 373 995 AFSL 230323, Elders Financial Planning ABN 48 007 997 186 AFSL 224645, Financial Services Partners ABN 15 089 512 587 AFSL 237 590, Millennium3 Financial Services Pty Ltd ABN 61 094 529 987 AFSL 244252, RI Advice Group Pty Ltd ABN 23 001 774 125 AFSL 238429, Shadforth Financial Group Ltd ABN 27 127 508 472 AFSL 318613 (‘Advice Licensees’). The Advice Licensees are part of the IOOF group comprising IOOF Holdings ABN 49 100 103 722 and its related bodies corporate (IOOF group). The Advice Licensees and/or their associated entities, directors and/or employees may have a material interest in, and may earn brokerage from, any securities or other financial products referred to in this document or may provide services to the company referred to in this report. The document is not available for distribution outside Australia and may not be passed on to any third person without the prior written consent of the Advice Licensees. The Advice Licensees and associated persons (including persons from whom information in this report is sourced) may do business or seek to do business with companies covered in its research reports. As a result, investors should be aware that the firms or other such persons may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as a single factor in making an investment decision. The document is current as at the date of issue but may be superseded by future publications. You can confirm the currency of this document by checking the intranet site (links below). The information contained in this report is for the sole use of advisers and clients of AFSL entities authorised by the Advice Licensees. This report may be used on the express condition that you have obtained a copy of the Advice Licensees Financial Services Guide (FSG) from their respective website. Disclaimer: The information in this report is general advice only and does not take into account the financial circumstances, needs and objectives of any particular investor. Before acting on the advice contained in this document, you should assess your own circumstances or seek advice from a financial adviser. Where applicable, you should obtain and consider a copy of the Product Disclosure Statement, prospectus or other disclosure material relevant to the financial product before making a decision to acquire a financial product. It is important to note that investments may go up and down and past performance is not an indicator of future performance. The contents of this report should not be disclosed, in whole or in part, to any other party without the prior consent of the IOOF Research Team and Advice Licensees. To the extent permitted by the law, the IOOF Research team and Advice Licensees and their associated entities are not liable for any loss or damage arising from, or in relation to, the contents of this report. For information regarding any potential conflicts of interest and analyst holdings; IOOF Research Team’s coverage criteria, methodology and spread of ratings; and summary information about the qualifications and experience of the IOOF Research Team please visit https://www.ioof.com.au/adviser/investment_funds/ioof_advice_research_process.
