Offset or Redraw – which will work best for you?

If you’re shopping around for that perfect home loan deal, you may have heard the terms ‘offset’ and ‘redraw’ often. Lenders commonly offer both features, and each can help you save money over the life of your loan.

To know which will work best for you, you first need to understand the differences between an offset account and a redraw facility and the benefits and drawbacks of each.

Offset

An offset account is a transaction or savings account used to ‘offset’ the balance of your mortgage. These accounts are tied to your mortgage but typically act in the way a regular bank account would, with some lenders even offering debit cards that can be used to access the funds.

The money held in your offset account is deducted from the total amount owing on your mortgage for the purposes of calculating interest. That means the more money you put into your offset account, the more you will save.
For this reason, offset accounts work best when you deposit your pay directly into them and only withdraw money as needed.

Benefits
Many borrowers favour offset accounts due to the way the account functions – even though the funds are linked to your mortgage account, they are still easily accessible to be used as needed.
Offset accounts can be a great way to save money. Reducing the interest you’re paying can reduce the size of your repayments or shorten the life of your loan.

Downsides
Since an offset account can reduce the amount you’re paying in interest, it only makes sense that some lenders charge higher fees or a higher rate of interest on products with an offset account.

Additionally, not all offset accounts will use 100% of the funds stored in the account against your mortgage. Partial offset accounts aren’t uncommon and will only take into consideration a specified percentage of your balance.
Although offset accounts can be a powerful tool for reducing your interest payments, you’ll likely find the benefits to be negligible unless the account holds a significant sum.

Redraw

A redraw facility allows you to make extra repayments into your mortgage and use those additional repayments as a source of funds as necessary. Putting extra repayments into your mortgage reduces the interest you’ll pay by reducing the amount owing ad shortening the life of your loan.
Generally, funds stored in a redraw facility aren’t as easy to access as those in an offset account, but they do work directly toward paying your loan off faster.

Benefits                                                                                                                                                                                                                                                Making extra repayments is the easiest way to reduce your debt and the amount of interest you’ll have to pay over the life of your loan. Redraw facilities are relatively common loan add-ons, and having your funds in a harder-to-access account means they’re less likely to get spent unless you really need them. 

Downsides
Because the money put into your mortgage as additional repayments are going toward paying off your loan, your bank can decide when and how you can get access to these additional funds in the form of redraw. You may find you have a minimum or maximum redraw amount, have to pay redraw fees, or that your bank simply changes its policy on how much redraw is available to you.
When requesting to redraw funds, you may find they aren’t always available same-day, making redraw facilities overall less flexible than an offset account. You should also keep in mind that those extra funds you’ve put into your home loan are only available while your mortgage account stays open.

Redraw facilities are less flexible than offset accounts, and the funds requested aren’t always available same-day


The bottom line

When it comes down to deciding whether you should go with an offset account or a redraw facility you should consider your personal financial goals and needs.

Suppose you’re interested in paying off your loan faster and prefer to have your extra funds stored somewhere that isn’t immediately accessible. In that case, a redraw facility might be the way to go.

If you’re the kind of person who prefers the flexibility of accessing their funds whenever they need them, and is more interested in paying less interest than paying off their loan as quick as possible, then an offset account may be better suited to you.

If you’re still undecided, having a chat with a broker can help you better understand the benefits of each option and how they can work for you.