When you’re considering taking out a home loan, one of the first things you’ll want to know is what type of features are available. There are many loan features that these days come standard with most mortgages, such as direct salary credit facilities and being able to pay fortnightly or monthly. But among the most common facilities borrowers look for are redraw or offset.
Essentially, redraw and offset are loan features that allow you to use any extra savings to reduce the balance of your loan – which reduces your interest charges - while allowing you to access that money later if needed. While these features serve the same basic purpose, the way they operate is slightly different. The main purposes of offset and redraw facilities are to provide you with greater flexibility around how you use your money, reduce the amount of interest you pay on your loan and enable you to pay off your loan earlier.
How redraw works
A loan with a redraw facility and permissible extra repayments allows you to deposit additional amounts into your loan account and then, when the money is needed for whatever reason, you can withdraw these excess funds. For example, you might redraw an amount to help pay for your children’s school fees, or use it to pay for some renovations. Any additional repayments you make that you don’t redraw from the loan will reduce your principal amount owing and therefore decrease your interest charges.
How an offset account works
An offset account is a separate facility that is linked to your loan account. The balance of the offset account is ‘offset’ against your loan balance for the purposes of calculating the interest charged to your loan account. It operates as a transaction account, which means you always have access to your funds.
Offset accounts are typically thought of as being more suitable for day-to-day transactions and usually come with a debit card. However many loans that offer redraw instead of offset also provide debit cards. Some offset accounts are 100% offset, which means that 100% of the balance of the offset account is used to offset the loan balance for the purpose of charging interest.
Examples of how they work:
Loan Account A – with redraw (and unlimited extra repayments):
- Loan balance before considering any additional repayments (“Amortised Loan Facility”): $400,000
- Savings deposited into account over and above regular loan repayments (“Available Redraw”): $20,000
- Loan balance upon which interest is calculated (“Balance”): $380,000
Loan Account B – with offset account:
- Loan Account Balance $400,000
- Offset Account Balance $20,000
- ‘Effective’ loan balance upon which interest is calculated: $380,000
The net result of these two scenarios is different. In both examples, the principal of $400,000 is offset by savings of $20,000, leaving a balance of $380,000 that is subject to interest charges.
Things to watch out for
On many fixed rate loans there are restrictions on offset accounts and on the ability to make extra repayments and subsequently redraw on these payments. If you are considering a fixed rate loan, ask your lender if offset accounts or redraw are possible and if so what restrictions exist.
Some loans will also have minimum and maximum amounts that can be accessed via redraw, and may also charge fees for accessing your available redraw. On loans with a redraw facility, in order to enable you to increase your amount that is available to redraw you must make extra repayments. It is important to check whether there are any restrictions on these extra repayments, such as minimum or maximum amounts.
Some loans require a minimum balance in the offset account before the interest offset functionality takes effect.
Which one should I choose?
To me, it makes no difference - as long as a loan account offered one or the other then I believe it would be suitable for most borrowers’ needs. If you don’t plan on dipping into the savings frequently, then a redraw facility may be more suitable as it can discourage regular withdrawals as mentally we see it as a loan account rather than a savings account.
Offset accounts can be more attractive for borrowers who want to use it like a normal transaction account, with their salary being deposited into it every month and easy access to their money. In some circumstances involving investment properties, accountants encourage their clients to opt for a loan with an offset account, so if you feel this may apply to you, check with your accountant.
Before agreeing to either feature, check out the fees and conditions on both accounts. If you don’t intend to deposit a large sum into your loan account, then the fees could cancel out any interest savings made.
Some of the fees for both offset and redraw include transaction fees, monthly account-keeping fees and sometimes a withdrawal fee. Overall, offset or redraw facilities are great features to have with a loan. If you use them wisely, they can cut years off your mortgage term and save you thousands in interest repayments.
It can be confusing to know whether to get a variable rate or fixed rate mortgage, and what features are important. That's why it's important to not only check the right rates, but make sure that you're getting the right features in your home loan. Get help choosing the right home loan
Will Keall, iMortgage’s general manager, has a wealth of marketing and business development experience gained in Australia and the United Kingdom. These include high level roles in a range of sectors such as financial services, insurance, travel and tourism, motoring and professional services.
Will played a pivotal role in the successful establishment of iMortgage. His dedication and passion for the mortgage industry have won Will the utmost respect as an integral part of the iMortgage brand.
A self confessed “numbers and brand geek”, Will calls himself a conservative investor with a long-term philosophy. He also believes it’s important to “love where you live.”
Will is a cricket and football tragic, who also enjoys running.