Using redraw and offset accounts to your advantage

Offset accounts and redraw facilities are two of those tools which can help use any spare capital or cash balances to your advantage and create real savings over the long-term. Which tool is best for you depends on your particular situation.

Offset accounts and redraw facilities are similar in the way they work. Each mechanism allows homeowners to reduce the balance of your home loan, and therefore the interest charged, by applying extra money to your debt.

However, there are subtle differences so deciding between an offset account and a redraw facility on your home loan largely depends on how accessible you need your extra money to be.

What is an offset account?

Offset accounts work a little like savings accounts in the way they function alongside your home loan. You earn interest on the money in the offset account and you often have a debit card attached, which allows for simple withdrawals. You can put money in and take money out any time, but the balance is linked to your home loan.

The money you keep in an offset account works to reduce the overall interest you pay on your loan. That’s because interest is calculated on your home loan balance, minus the balance kept in your offset. More in your offset account means a lower overall home loan balance, which leads to less interest calculated daily.

It’s worth noting some lenders charge fees for offset accounts or have limits on how many you can open. If you get it right though, the fees may be worth the interest savings and the added flexibility. Getting the right loan for your home is always about weighing the pros and cons to make sure you’re getting the best deal overall, so always check the terms and conditions – or talk to an expert – before opening one.

What is a redraw facility?

A redraw facility works like a financial buffer, building up funds so you can access them if you need them. Rather than sticking a block of cash in an offset account, you instead make extra repayments on top of your minimum fortnightly or monthly home loan repayment. These extra funds accumulate with each payment but can be taken out – or redrawn – if you need them for any unexpected expenses, such as renovations, repairs or larger bills you didn’t see coming.

While the safety net is nice, having funds available in redraw also reduces the balance of the home loan that your interest is calculated and charged on. When the interest is calculated daily, every day you have extra funds against your loan helps make your overall commitment grow that little bit less.

Which is best?

That depends on your circumstances and what you want from your home loan.

A redraw facility varies slightly from an offset account in that it is not an account as such, but a feature attached to your home loan. While it does let you access additional repayments you’ve made on your home loan, it usually doesn’t offer the same flexibility as an offset account.

With redraw facilities, there may be restrictions on how much money can be withdrawn and when. It may seem obvious, but the amount you can redraw is limited to the surplus you’ve accumulated on your loan. You can only take out the extra that you’ve put in. Redraw is usually only for variable rate home loans as well. If your home loan is on a fixed rate, you’ll likely need to wait until the end of your fixed rate term to redraw.

It’s important to find out how a loan’s redraw facility works before taking it on, as the fees and restrictions attached might outweigh the benefits of interest savings. As always, it will depend on your individual circumstances so make sure you are aware of the details on your particular loan.