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Offset account versus redraw: What’s the difference?
A redraw facility and an offset account let you reduce your loan's interest costs while accessing your savings. An offset gives you more control over your money.
At first glance, a redraw facility and an offset account look similar. You put extra cash in them and then pay less interest. If you need the cash, you pull it out. But there are differences.
What is a redraw facility?
If you make extra repayments into your mortgage, a redraw facility allows you to take that money out again later when you need it. While the money sits in your mortgage, it lowers the amount of your principal and reduces the interest you pay.
What is an offset account?
You can save money in an offset account, which is like a bank account attached to your home loan. This money reduces the interest you pay while it's in the account, so you pay more off the principal and repay the mortgage faster, but the money is easy to access whenever you need it.
Offset account versus redraw facility
Both features give you the ability to pay less interest on your mortgage. However, an offset account gives you much more control over your money because it's functionally like a bank account. Lenders often impose restrictions or fees on your redraw. They can't do that with an offset.
Here's a deeper look into how they compare:
Offset account
Redraw facility
How it works
A separate bank account is attached to your home loan. The money in your offset account acts like an extra repayment in terms of how your mortgage interest is calculated, but it is yours to spend as you need.
You make an extra repayment/s onto your home loan. This money can be "redrawn" or removed from the loan to spend as needed.
Benefit
Spend the money when you need it, but while it's in the account, you'll pay less interest.
Extra repayments mean you work towards paying down your loan faster and pay less interest, but being able to redraw the money helps in an emergency.
Drawbacks
Mortgages with offset accounts may have slightly higher interest rates. Also, unlike a savings account, money in an offset doesn't generate interest for you, but it saves you more in interest charges than you would earn in interest anyway.
Offset accounts give you more control over your money. While it's in the offset account, it's your cash; you can withdraw any amount, from 0.5c to $50,000, and spend it at your discretion at any time.
Extra repayments are technically the lender's money as the funds have been repaid on the loan. They allow you to access some of it at their discretion.
Access
Card, ATM, online or bank branch, depending on the lender.
Varies by lender, but usually online and sometimes via branch or ATM.
Separate account?
Yes
No
Fees
Most lenders don't charge a fee for this feature, but it may form part of a professional package with an annual fee. Some lenders also charge a monthly offset account fee (usually around $10).
Some lenders charge a fee each time you redraw money from the loan. Others specify a minimum redraw amount, and/or a maximum number of redraws per year.
How a redraw facility works
Your minimum monthly loan repayments are $2,000.
However, you pay $2,200 each month for 6 months, which equals $1,200 in extra repayments.
A redraw facility allows you to access that extra $1,200 if you need to.
Other things to know about a redraw facility:
Many redraw facilities will come with additional fees for withdrawing and depositing money. There may also be restrictions on how much and how often you can redraw in any given period. Check the terms and conditions of your home loan contract for specific information about redraw restrictions.
Finder survey: How many Australians understand how offset accounts work?
Response
Yes
76.62%
No
23.38%
Source: Finder survey by Pure Profile of 1112 Australians, December 2023
How an offset account works
You owe $300,000 on your home loan.
You save $10,000 in your offset account.
Your lender only charges interest on $290,000.
If you need to spend that $10,000, then you're back to $300,000 and you'll pay more interest again.
Use our offset calculator and try it for yourself.
Offset account vs redraw facility: Which one is better?
Both an offset and redraw will save you a similar amount of interest, so there are other things to be aware of when choosing which to use.
An offset account gives you greater flexibility and control over your cash while offering the same benefits as a redraw. For instance, if you have $10,000 and you're trying to decide whether to make an extra repayment with the potential to redraw later, or to place that $10,000 in an offset account, both options will save you the same amount of interest on your home loan.
The main thing to consider is what you really want from your home loan.
Paying less interest.
The winner: Both.
Both a redraw facility and an offset account will save you around the same amount of interest.
For flexibility and control.
The winner: Offset account.
An offset account gives you much more control over your money. There can be more restrictions on making extra repayments and redraw. With an offset account, it's your money in a separate account so there's much more freedom.
For keeping it simple.
The winner: Redraw facility.
Redraw allows you to set and forget your extra repayments, and only pull out funds via redraw in an emergency.
The trick to getting the biggest benefits from offset accounts is to keep as much money in them as possible, for as long as possible.
There are a couple of ways to do this:
Have your wages paid directly into your offset. By doing this for at least a few days (as long as you don't withdraw it all at once) your balance will be fairly high. If you have any savings, you should also think about moving them into your offset.
Consider making all your purchases on a credit card. By paying for all your daily transactions with a credit card, you're keeping your offset account balance as high as possible for as long as possible, because you're not using your savings to pay for anything. Instead, you simply pay off your entire credit card debt at the end of the month. The offset with credit card strategy requires discipline because you'll face big interest charges if you don't repay your credit card on time.
Are there tax advantages for using an offset over redraw?
Yes. There are tax benefits for investors using an offset account. If you turned your home into an investment property and bought a new home later, your existing mortgage would become an investment mortgage. In this scenario, you would be better off having more debt in your investment loan and a smaller loan for your new property (which is now your home).
This is because interest charged on investment loans is tax-deductible but the interest on your owner-occupier loan is not. If you made extra repayments on your home loan before turning it into an investment, the loan would be smaller. You've reduced the amount of debt you can use to reduce your tax bill.
But if you'd avoided making extra repayments and instead saved the money in an offset account, you could pull it out and use it to pay off your new loan. Your investment loan debt would be bigger now, but it would be tax-deductible. The tax office won't let you do this with extra repayments even if you can redraw them.
Compare mortgages which have redraw facilities or offset accounts
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If I get a split loan with half on a fixed rate and half on a variable rate, is there such a thing as getting an offset account linked to the variable half and a redraw facility linked to the fixed half? I’d like the ability to keep a linked offset account for my wages but still have the option of making extra repayments with a redraw facility. Is it possible to have both on a split loan?
It would be best to speak to your lender/bank on this matter. Please note that the split rate home loans may be an option for those who want some of the features and security which comes with a combination of variable and a fixed rate home loans. This means the flexibility of a variable rate home loan, with the security of a fixed rate home loan, which can see borrowers lower their risk when it comes to rising interest rates but not discussed on having the portion of your loan on redraw or offset.
Say I borrow $100,000 investment loan and I have say $80,000 savings. There is the offset loan which comes with higher interest rates and fees and there is redraw loan with lower interest rates and low/zero fees. From investment purposes, which one allows “greater tax benefits/deduction”? Assuming you don’t need to access the $80,000 anytime in near future. Please advise. Thanks.
While we can’t tell which of the two allows you to get more tax benefits, generally, this would depend on some factors. Nevertheless, you may take a look at our guides on how tax can help your offset home loan and investment property tax spreadsheet and hope you can find it helpful. Also. I would suggest that you contact a tax agent/accountant who can best advise as they take your personal circumstance into account.
I recently refinanced with my same lender and currently have a home loan with a debt of $92,000, and redraw funds of $162,000. I have just noticed that the bank is charging me weekly repayments on a loan amount of $254,000 (so the total amount of debt and redraw funds). I was lead to believe that my repayments would be calculated on the debt only, and not the redraw funds. Is this correct, or have I misunderstood? I am extremely concerned if I have got it wrong, as I’ve just committed to a 3 year package, which includes another 2 loans. This particular loan that I am asking about is a variable interest rate, the other 2 are fixed interest rates.
After you redraw money from your home loan, the interest part of your repayments will increase because you will be paying interest on your original home loan and your redraw funds. This is true for most home loans with redraw facility.
It is best if you review the terms and conditions of your home loan to check how much you’ll be charged for accessing your redraw funds.
If you have a redraw amount of $40,000, this means that you can access that amount if you need to, although lenders only do this in the case of an emergency.
Kindly note that a lot of the redraw facilities will come with additional fees for withdrawing and depositing money. The lenders may charge these fees straight away or they may give you a few free redraws and deposits a month. There may also be restrictions on how much and how often you can redraw in any given period. Check the terms and conditions of your home loan contract for specific information about redraw restrictions.
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If I get a split loan with half on a fixed rate and half on a variable rate, is there such a thing as getting an offset account linked to the variable half and a redraw facility linked to the fixed half? I’d like the ability to keep a linked offset account for my wages but still have the option of making extra repayments with a redraw facility. Is it possible to have both on a split loan?
Thanks.
Hi Gary,
Thank you for getting in touch with Finder.
It would be best to speak to your lender/bank on this matter. Please note that the split rate home loans may be an option for those who want some of the features and security which comes with a combination of variable and a fixed rate home loans. This means the flexibility of a variable rate home loan, with the security of a fixed rate home loan, which can see borrowers lower their risk when it comes to rising interest rates but not discussed on having the portion of your loan on redraw or offset.
I hope this helps.
Thank you and have a wonderful day!
Cheers,
Jeni
Say I borrow $100,000 investment loan and I have say $80,000 savings. There is the offset loan which comes with higher interest rates and fees and there is redraw loan with lower interest rates and low/zero fees. From investment purposes, which one allows “greater tax benefits/deduction”? Assuming you don’t need to access the $80,000 anytime in near future. Please advise. Thanks.
Hi Michelle,
Thank you for getting in touch.
While we can’t tell which of the two allows you to get more tax benefits, generally, this would depend on some factors. Nevertheless, you may take a look at our guides on how tax can help your offset home loan and investment property tax spreadsheet and hope you can find it helpful. Also. I would suggest that you contact a tax agent/accountant who can best advise as they take your personal circumstance into account.
Cheers,
May
Hello,
I recently refinanced with my same lender and currently have a home loan with a debt of $92,000, and redraw funds of $162,000. I have just noticed that the bank is charging me weekly repayments on a loan amount of $254,000 (so the total amount of debt and redraw funds). I was lead to believe that my repayments would be calculated on the debt only, and not the redraw funds. Is this correct, or have I misunderstood? I am extremely concerned if I have got it wrong, as I’ve just committed to a 3 year package, which includes another 2 loans. This particular loan that I am asking about is a variable interest rate, the other 2 are fixed interest rates.
Many thanks,
Fiona.
Hi Fiona,
Thanks for your question.
After you redraw money from your home loan, the interest part of your repayments will increase because you will be paying interest on your original home loan and your redraw funds. This is true for most home loans with redraw facility.
It is best if you review the terms and conditions of your home loan to check how much you’ll be charged for accessing your redraw funds.
Cheers,
Anndy
If I have a redraw amount of say $40,000 and a mortgage of $80,000 what exactly does that mean?
Hi Judy,
Thanks for your question.
If you have a redraw amount of $40,000, this means that you can access that amount if you need to, although lenders only do this in the case of an emergency.
Kindly note that a lot of the redraw facilities will come with additional fees for withdrawing and depositing money. The lenders may charge these fees straight away or they may give you a few free redraws and deposits a month. There may also be restrictions on how much and how often you can redraw in any given period. Check the terms and conditions of your home loan contract for specific information about redraw restrictions.
Cheers,
Anndy
My question is if one loan is 108,000 and another is 221,843.
One house is sold for 210.00 which leaves 329843 minus 210000 plus 6270 agent fees a total of 126113. how can hat leave the bank loan of 144000?
Which is supposed to be from a redraw amount I didn’t even know I had and I am not allowed to take off principal. Don’t understand
Hi Lisa,
I’m sorry, I don’t understand what you are trying to say. Could you please give me a bit more context?
Cheers,
Shirley