Offset vs redraw - which is better?

While the interest rate on a mortgage can tell you how competitive a home loan offer is, it won't provide 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 the fact you can still use money kept in it for day-to-day transactions. You can make deposits and withdrawals to and from an offset account whenever you want to.

Two tried-and-tested ways a borrower might benefit from 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.

Important Information and Comparison Rate Warning

The benefits of a redraw facility

If you have a redraw facility and choose to make extra repayments on 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 on the extra money you 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.

How much can you save with an offset account or redraw facility?

Now that we've established that you can save on the amount of interest you pay by making extra payments into either an offset account or redraw facility, let's take a look at some numbers to see just how much it can save you.

The figures below are calculated on a $650,000 loan, paying 5% interest over 30 years:

Extra monthly payments or amount added to offset balance each month	Total interest paid	Interest saved
$0	$606,162	none
$100	$562,551	$43,611
$500	$439,900	$166,262
$1,000	$348,200	$257,962

Source: Your Mortgage's Mortgage Repayment Calculator

Similarities of offset accounts vs redraw facilities

Reduce the interest you pay

Both offset accounts and redraw facilities effectively reduce the loan balance that your interest payments are calculated on and, as you can see in the table above, both can save you thousands, if not hundreds of thousands, of dollars over the course of your mortgage.

Reduce your loan term

Hand in hand with cutting the interest bill on your home loan, an offset or redraw facility can also significantly cut down the time you have your home loan for.

Boosting your monthly loan repayments or putting extra cash into an offset or redraw facility effectively sees you pay off your loan much faster. This is because as the loan balance reduces, the minimum monthly repayments will likely more than cover the interest due and continue to eat into the principal the interest is calculated on.

As the principal falls, the interest payable does too, which means more of your regular repayments go towards repaying the principal balance, thereby reducing the amount of time you'll need to pay it back. Let's look at the time taken to pay that same home loan of $650,000 at 5% interest with extra monthly repayments.

Extra monthly payments or amount added to offset balance each month	Time to pay off loan	Time shaved from loan term
$0	30 years	nil
$100	28 years, 3 months	One year, nine months
$500	22 years, 10 months	Seven years, two months
$1,000	18 years, 7 months	11 years, four months

As you can see, consistent, diligent use of offset accounts and redraw facilities can make a significant difference to paying back your home loan.

Offset vs. redraw: key differences

Offset accounts and redraw facilities can both be a great addition to your home loan and either 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 and your financial habits.

Here are a few factors to consider when choosing which could be the better option for you:

Flexibility

An offset account is essentially a transaction account that's linked to your home loan. It exists separately and will have its own account number. It also means you can use your offset account however you wish.

But a redraw facility is not a separate account, rather a feature attached to your home loan. The extra cash you put into your home loan is essentially cash you have already paid to your lender and when you redraw it, you will be taking it back from them. That's where the next consideration can come into play.

Accessibility

An offset account allows you instant, unrestricted access to your money. Conversely, a redraw facility is not technically your pot of money to dip into. This means you will generally need to request access to your extra funds.

Depending on your home loan product, some redraw facilities may also come with restrictions, such as limits on how much you can take out at one 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 hoops 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.

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'll should carefully weigh the higher costs against the potential savings you 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.

Tax implications of offset accounts and redraw facilities

For owner occupiers, there are no tax implications in choosing either an offset account or a redraw facility.

But choosing one over the other can have tax implications for owners of investment properties. Even as an owner-occupier, you might want to consider these in case you choose to rent out your home in the future.

For investors, the interest they pay on investment home loans can be tax deductible.

However, if you withdraw funds from a redraw facility, you may not be able to claim the interest charged on any redrawn funds unless they're used for investment purposes.

This means you may forego tax benefits on interest paid for your investment property if you use redrawn funds for, say, a deposit on a home you plan to live in, car repairs, or a holiday. You will, however, still be able to claim the interest charged if you use the funds to invest in a business or purchase another investment property or shares.

On the other hand, funds from an offset account can be used for any purpose and won't affect the tax deductibility of any interest payments on your investment loan.

How to choose between an offset account and a redraw facility

If your goal is to save on interest and pay off your home loan earlier, either an offset account or 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.

Availability

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. You'll need to work out whether the flexibility and accessibility that can come with an offset account is worth the potential extra expense for your purposes.

Tip: While most low-cost home loans don't offer offset accounts as standard, a number do. It's worth carefully comparing all your mortgage options to find the best deal for you.

Full vs partial offset

Redraw facilities will offset all of your extra payments against your loan balance, but not all offset accounts do the same.

Look for offset accounts that offset 100% of the account balance against the balance of a home loan.

Some loans with offset accounts only partially offset against the home loan's principal (e.g. 80% of the account's balance rather than 100%, or some may charge a lower interest rate on the offset amount while the remaining balance of your loan is charged at a regular home loan rate).

Self-control

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 and you plan to make other transactions from the account.

But 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. This may be a good thing for you.

Do both

Some lenders won't make you choose, instead offering both an offset account and a redraw facility as part of a home loan.

Ultimately, both offset accounts and redraw facilities can save you in interest - as we've seen, potentially tens of thousands of dollars, as well as slicing many years off the life of your home loan.

If you want to gauge how much you could save, our extra and lump sum payment calculator could give you some idea.

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