Offset accounts and redraw facilities are two home loan features that allow you to use any extra income or savings to reduce the balance of your loan, thereby reducing your interest repayments. There are similarities between the two, but they operate in different ways.
From the Offset
An offset account is a savings or transaction account that is run in conjunction with your loan account.
Many offset accounts earn you interest on your savings at a rate similar to a standard savings account. Offset accounts operate as regular transaction accounts, giving you ready access to your funds.
Interest earned on the account is automatically deposited into you home loan account, thereby reducing the balance of your loan – which consequently reduces your interest repayments.
Because you don't see the interest, you are not taxed on it as you would be with a standard savings account. However, with interest rates paid on savings accounts as low as they currently are, this is unlikely to represent much of a saving.
Take a scenario where you owe $100,000 on your loan on which you are paying 7% interest. You have an offset account with a balance of $10,000 on which you are earning 3% in interest:
Given this scenario, interest savings of $300 are made on your regular home loan repayments over one year. Considering you must have $10,000 in your offset account to achieve this, it doesn’t represent much of a saving.
You can test this scenario using our mortgage calcultor tools.
100% offset accounts
100% offset accounts are the most attractive offset option. These accounts earn you interest equal to the interest you're paying on your home loan. The interest that you’re earning on your savings is offset against the interest you're paying on your loan.
Many loan products offer access to your funds via ATM and EFTPOS. Some also offer you a Visa card with a 45-day interest free period which can be used to pay bills, while your funds remain untouched in your account earning interest.
Again look at the scenario where you owe $100,000 on your loan and are paying seven percent interest. You are running a 100% offset account with a balance of $10,000 on which you are also earning 7%:
A redraw facility enables you to deposit any spare income you have directly into your home loan account. You can then redraw from the loan any funds that are in excess of your regular repayments.
For institutions such as mortgage managers who generally don’t have access to deposit facilities and hence the means to run offset accounts, a redraw facility is the alternative.
In terms of interest savings, a redraw facility has much the same effect as a 100% offset account. Once again look at the situation where you owe $100,000 and are paying interest of 7%. If you deposit $10,000 into the loan account, you are YMeffectively only paying 7% interest on a balance of $90,000:
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Offset vs redraw
If a 100% offset account and a redraw facility have the same outcome in terms of interest savings, what are the advantages of one over the other?
Because offset accounts are essentially savings accounts and operate as such, you'll have easy access to your funds. Most come with an ATM, EFTPOS and cheque access, some offer phone banking and some even have a credit card attached.
Transaction fees may be charged in the same manner as a standard savings account, but most lenders will waive transaction charges on offset accounts altogether. Ideally, you can arrange to have all of your salary paid directly into the offset account. This ensures that any income not spent is being used to reduce the balance of your loan. While receiving the interest savings you have peace of mind in knowing that you can access your funds at any time.
Some institutions will limit you to as few as two redraws per year. Others will charge you up to $50 per withdrawal, and some even insist that you redraw a minimum of $3,000. Certain institutions require written notice of withdrawal of funds. Look for a redraw facility that provides you with maximum flexibility at minimum cost.
Be sure to find out exactly how the loan's redraw facility operates before you sign up, because they’re not all the same. A 100% offset account will be a more attractive option than a restrictive or expensive redraw facility if you’re intending to use the account for day-to-day transactions.