Offset vs Redraw – Which One Saves You More Money?
Offset accounts and redraw facilities are two features that many home loan products offer to help borrowers manage their mortgages more effectively. An offset account is a savings account that is linked to your home loan, where the balance of your savings is offset against your outstanding loan balance, reducing the amount of interest charged on your loan. On the other hand, a redraw facility allows you to access the additional payments you’ve made towards your loan over and above your regular repayments.
Both options can help you save money on interest and potentially pay off your loan faster. However, they work differently, and the best option for you will depend on your individual circumstances. By understanding the features and benefits of both offset accounts and redraw facilities, you can make an informed decision on which option to choose.
In this article, we’ll explore the differences between offset and redraw facilities and help you determine which one is right for your situation.
What is an Offset Account?
An offset account is a transaction account that’s linked to your mortgage account. The balance of your offset account is subtracted from your mortgage account balance before interest is calculated.
This means that you’ll only pay interest on the difference between your mortgage balance and the balance of your offset account. For example, if you have a mortgage balance of $500,000 and an offset account balance of $50,000, you’ll only pay interest on $450,000.
What is a Redraw Facility?
A redraw facility is an option that allows you to make additional repayments on your mortgage above the minimum required amount. The extra payments are held in a separate account and can be accessed later if needed.
This can help you reduce the interest payable on your loan and pay off your mortgage faster. You can make extra payments whenever you like and as often as you like, subject to the terms of your loan agreement.
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The Benefits and Drawbacks of Offset and Redraw Facilities
A redraw facility is an option that allows you to make additional repayments on your mortgage above the minimum required amount. The extra payments are held in a separate account and can be accessed later if needed.
This can help you reduce the interest payable on your loan and pay off your mortgage faster. You can make extra payments whenever you like and as often as you like, subject to the terms of your loan agreement.
Benefits of an Offset Account
- Lower interest payments: An offset account can reduce the amount of interest you pay on your mortgage because the interest is calculated on the net balance of your loan and offset account. This can be particularly helpful if you have a high balance in your offset account.
- Flexibility: You can deposit and withdraw money from your offset account whenever you like, making it a flexible option for managing your finances.
- Tax benefits: The money in your offset account is not considered as taxable income, so you won’t pay tax on the interest you save.
Drawbacks of an Offset Account
- Fees: Some offset accounts charge monthly fees, which can eat into the savings you make on interest.
- Lower interest rate: Some lenders may offer a lower interest rate on mortgages with an offset account, which can offset the savings you make on interest.
Benefits of a Redraw Facility
- Flexibility: A redraw facility allows you to make extra repayments on your mortgage and access those funds later if needed. This can be helpful if you have unexpected expenses or need to make a large purchase.
- No fees: There are usually no fees associated with a redraw facility, which can make it a cost-effective option.
- Increased savings: By making extra repayments, you can reduce the amount of interest you pay on your mortgage and save money in the long run.
Drawbacks of a Redraw Facility
- Limited access: Some redraw facilities may have limits on how much you can withdraw and when you can access the funds. This can make it difficult to access funds in an emergency.
Offset vs Redraw - Which Option is Right for You?
Deciding between an offset account and a redraw facility can be challenging, and it depends on your financial situation and priorities. Here are a few factors to consider:
- Your income and expenses: If you have a stable income and can maintain a healthy balance in your offset account, an offset account may be a better option. If you have unpredictable income or expenses, a redraw facility may be a better choice.
- Your financial goals: If your primary goal is to pay off your mortgage as soon as possible, a redraw facility may be the best option. If you’re looking to manage your cash flow and save on interest over the long term, an offset account may be a better choice.
- Fees and interest rates: Make sure to compare the fees and interest rates associated with each option. While an offset account may save you money on interest, the fees may eat into those savings. Likewise, a redraw facility may be fee-free, but the interest rates may be higher.
Offset accounts and redraw facilities are both useful options for managing your mortgage as an Australian expat. By reducing the amount of interest you pay, you can save money over the life of your loan and pay off your mortgage faster. However, it’s essential to choose the right option for your individual circumstances. By considering your income, expenses, and financial goals, you can make an informed decision and save money on your mortgage.
Ultimately, the right option depends on your individual circumstances, so it’s essential to do your research and speak to a mortgage broker or financial advisor.
At Odin Mortgage, we’re dedicated to helping Australian expats and foreign investors to find the right mortgage solutions for their unique needs.
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Get a free Australian mortgage assessment today.
Frequently asked questions
An offset account is a transaction account that’s linked to your mortgage account. The balance of your offset account is subtracted from your mortgage account balance before interest is calculated. A redraw facility is an option that allows you to make additional repayments on your mortgage above the minimum required amount. The extra payments are held in a separate account and can be accessed later if needed.
The amount you can save with an offset account depends on several factors, including the balance of your offset account, the interest rate on your mortgage, and the fees associated with your account. Use our mortgage offset calculator to determine how much you could save.
Yes, some lenders offer both options, so it’s possible to have both an offset account and a redraw facility. However, you’ll need to weigh up the benefits and drawbacks of each option to determine whether it’s right for you.
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