Offset accounts and redraw facilities work in similar ways. They both allow you to reduce the balance of your home loan, and therefore the interest charged, by applying extra money to your debt.
Deciding between an offset account and a redraw facility on your home loan largely depends on the circumstances surrounding how you wish to use each facility and how often.
Redraw facilities:
Redraw facilities allow you to deposit spare income into your home loan account, allowing you to redraw a sum equal to the extra repayment amounts in the future.
In the meantime, the extra money paid will lower the amount of interest charged, while still giving you access to your money.
However, there may be restrictions on how much money can be withdrawn and when.
Most institutions only allow redraw from a variable-rate loan, or with limited access from a fixed-rate loan.
It’s important to find out how a loan’s redraw facility works before taking it on, as the fees and restriction attached might outweigh the benefits of interest savings.
Offset accounts:
What is an offset account?
An offset account functions as a regular bank account connected to your mortgage. You can deposit your income and savings into this account, and its balance is then used to offset the outstanding balance on your home loan.
For instance, if your home loan amount is $100,000 and you have $10,000 in your offset account, you'll only be charged interest on $90,000 ($100,000 - $10,000).
Since the offset account functions similarly to a regular bank account, you can still access your $10,000 whenever necessary, even while it’s working to reduce your overall interest payments.
The benefits of an offset account largely hinge on the amount of money deposited and the type of offset arrangement you have in place.
Offset accounts, like many savings accounts, often come with account fees, but the fee may be worth the interest savings and the added flexibility compared to redraw facilities.
Disclaimer: Kanvas Capital Pty Ltd T/A Veritas Funding Solutions | Credit Representative Number 524625 is authorized under Australian Credit Licence 389328. Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product.
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