While the interest rate on a mortgage can tell you how competitive a home loan offer is, it won't provide you with the whole picture.
It's crucial to check if a mortgage offers features that could help you to reduce the amount of interest you pay and settle your home loan faster - such as offset accounts and redraw facilities.
These two common features allow you to use your extra funds to effectively reduce the amount of interest you pay over the life of your loan. If you're a diligent saver, they can be excellent vehicles to save you thousands of dollars.
But how do they differ and is one better than the other? Let's compare the two options.
The perks of an offset account
An offset account functions like a transaction account that's linked to your home loan.
Any money you keep in it is 'offset' against the balance of your home loan. The interest on your loan will be calculated by considering the principal loan balance minus the balance of your offset account.
So, if you have a $600,000 home loan and an offset account with a $50,000 balance, you'd only be charged interest on $550,000 of your home loan balance.
Perhaps the biggest benefit of an offset account is that you can still use money kept in it for day-to-day transactions. You can make deposits and withdrawals in and out of an offset account whenever you want to.
Two tried-and-tested ways a borrower might access the full savings potential of an offset account is organising for their salary to be paid into the account and using it to build up and store their emergency cash fund.
Check out some competitive home loans that come with offset accounts
The table below features some of the lowest interest rates on the market for home loans with offset accounts.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.95% p.a. | 5.95% p.a. | $2,385 | Principal & Interest | Variable | $0 | $0 | 90% | |||||||||||
6.18% p.a. | 6.55% p.a. | $2,445 | Principal & Interest | Variable | $395 | $0 | 80% | |||||||||||
5.99% p.a. | 6.51% p.a. | $2,396 | Principal & Interest | Variable | $0 | $530 | 90% | |||||||||||
6.08% p.a. | 6.14% p.a. | $2,419 | Principal & Interest | Variable | $0 | $840 | 90% | |||||||||||
6.14% p.a. | 6.39% p.a. | $2,434 | Principal & Interest | Variable | $248 | $350 | 60% | |||||||||||
6.14% p.a. | 6.36% p.a. | $2,434 | Principal & Interest | Variable | $15 | $250 | 60% |
The benefits of a redraw facility
If you have a redraw facility and choose to make extra repayments towards your home loan, you can access those extra repayments if you need to later on.
Any repayments made on top of the minimum required are pooled in a fund that sits on top of your home loan balance, allowing you to withdraw from it any time you want.
It's arguably a win-win, as you won't be charged interest for the extra money you've repaid, but you also haven't lost access to that money. Here's how it works:
If your regular home loan repayments are $2,000 per month but you decide to pay $2,200 a month, the extra $200 a month will go to your redraw facility. If you consistently pay $200 extra each month for five years, you will have made $12,000 of extra repayments.
If you leave the funds untouched, you will simply pay off your loan faster and save on interest expenses. But, if you wanted to, you could redraw the extra funds to pay for a new car, a holiday, or renovations.
Although, accessing funds from a redraw is often a more tedious exercise than accessing those kept in an offset account, and some lenders might charge a fee to do so.
Offset vs. redraw: key differences
Offset accounts and redraw facilities can both be a great addition to your home loan and each can help you save a considerable sum over the term of your loan.
Whether one would provide greater benefit than the other comes down to personal preference.
If you're unsure which one would be more useful, think about how each would fit with your current financial habits and circumstances.
Here are a few factors to consider when choosing which could be the better option for you:
Accessibility
An offset account allows you instant, unrestricted access to your money. Conversely, a redraw facility is not a separate account and you will generally need to request access to your extra funds.
Depending on your home loan product, redraw facilities may also come with other restrictions, such as limits on how much you can take out at a time or over the course of a year. Some lenders may also set minimum redraw amounts while others might charge redraw fees.
But such restrictions may not necessarily be a disadvantage. Some borrowers might prefer having to go through a few extra steps to gain access to their funds. Redraw facilities can be a good option for those who feel they might succumb to temptation if their spare cash is too easy to access.
Tax implications
Using a redraw facility over an offset account can have tax implications for owners of investment properties. You might also want to consider such implications even as an owner-occupier in case you ever choose to rent out your home in the future.
Interest charged on investment home loans can be tax deductible.
If you withdraw funds from a redraw facility, however, you may not be able to claim the interest charged on the funds you initially repaid and later redrew unless they're used for investment purposes. This means you may forego tax benefits if you use your extra funds for, say, car repairs or a holiday.
On the other hand, using an offset account won't affect the tax deductibility of any interest charged on your loan.
Fees and costs
Every home loan will have different terms and conditions, just as every lender has its own products and policies.
Not all home loans come with offset accounts, and those that do tend to have slightly higher interest rates and fees. You should carefully weigh the higher costs against the potential savings you'll realise by having an offset account.
While some redraw facilities may demand fees, this is generally only when you wish to access your funds. Additionally, many of the lowest-rate home loans on the market, even those with few fees, offer redraw facilities at no extra cost.
Make sure to check a home loan's terms and conditions to gain a thorough understanding of its fees and charges and assess it according to what best suits your needs.
Offset vs. redraw: what's better?
If your goal is to save on interest and pay off your home loan earlier, both an offset account and a redraw facility could help you get there. Which feature would better serve your purpose really comes down to your priorities, preferences, and financial habits.
Redraw facilities tend to be more widely available. Meanwhile, offset accounts only come with certain home loan products, and you may have to bear a slightly higher interest rate or pay an extra fee to have one.
It also pays to keep an eye out for offset accounts that offset 100% against the balance of a home loan. Many only partially offset against the home loan's principal.
If you're a disciplined saver, an offset account may benefit you more than a redraw facility. Particularly, if you get your salary paid directly into your offset account.
If you're the type that can be tempted to spend any ready cash, a redraw facility (and the extra hurdles it puts in place) might lead you to think twice before dipping into your additional repayments.
And some lenders won't make you choose, offering both an offset account and a redraw facility as part of your home loan.
Ultimately, both offset accounts and redraw facilities can save you in interest - perhaps saving you tens of thousands of dollars and shaving many years off the life of your home loan.
If you want to gauge how much you could save, you can use our extra and lump sum payment calculator to find out.
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