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Offset Vs Redraw: Which is Better?

  • The home loan experts we asked said redraw is often more cost-effective for owner-occupiers.
  • Investors may benefit more from an offset account.

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Offset account vs redraw

Offset vs redraw: What’s the difference?

An offset account is a transaction account that’s linked to your home loan. It saves you interest by reducing the balance of your home loan that interest is charged on. Redraw is a feature that allows you to withdraw money from your home loan if you have made extra payments.

Both an offset account and a redraw facility help you save money by reducing your home loan balance for the purpose of paying interest.

  • With a redraw facility, you save on interest directly because the extra payments you have made (but can still ’redraw’ if you need to) actually reduce your home loan balance.
  • An offset account indirectly saves you interest because the lender calculates your home loan interest based on your home loan balance, minus the balance of the linked offset account.

How they work...

Offset vs redraw

Offset vs redraw: Side-by-side comparison

Here’s a quick breakdown of the difference between an offset account and redraw facility based on Money’s analysis of hundreds of home loans.

What is it?

Offset

A transaction account linked to your home loan.

Redraw

A home loan feature that applies to the loan account itself.

How does it save you money?

Offset

Money in your offset account reduces the balance of your home loan that interest is charged on.

Redraw

It means you can make extra repayments on your home loan but access that money again if you need it.

Which home loans offer it?

Offset

Widely available on variable home loans (but not all) and a much smaller number of fixed-rate loans.

Redraw

Virtually all variable-rate home loans and some fixed-rate loans (there is also often a limit on extra repayments with a fixed loan).

Is there a cost?

Offset

Some lenders charge an extra home loan fee to access offset or a higher interest rate may apply to the loan.

Redraw

Online redraws are generally free but there may be a fee for redraws carried out at a branch or using phone banking.

How can I withdraw/spend money?

Offset

Generally the same way you would with any other transaction account (e.g. using a debit card).

Redraw

Via bank transfer from your home loan account to another bank account (you won’t be able to use a debit card).

Are there limits on how much interest you can save?

Offset

No, if it’s a 100% offset account. But some loans only offer ‘partial offset’.

Redraw

Usually not on a variable rate home loan, but extra repayments may be limited if available on a fixed loan.

Are there limits to how much I can withdraw?

Offset

No, you can withdraw any funds up to the balance of the account.

Redraw

Generally not, but some fixed loans have limits on how much extra you can pay and therefore have available to redraw.

Main advantage

Offset

Flexibility to easily use the money in the account as it works like any other transaction or savings account.

Redraw

You’re actually reducing your debt through the extra repayments while still being able to access that money.

Main disadvantage

Offset

There are sometimes higher interest rates on home loans with an offset account.

Redraw

Not as easy to access your money.

OffsetRedraw

What is it?

A transaction account linked to your home loan.

A home loan feature that applies to the loan account itself.

How does it save you money?

Money in your offset account reduces the balance of your home loan that interest is charged on.

It means you can make extra repayments on your home loan but access that money again if you need it.

Which home loans offer it?

Widely available on variable home loans (but not all) and a much smaller number of fixed-rate loans.

Virtually all variable-rate home loans and some fixed-rate loans (there is also often a limit on extra repayments with a fixed loan).

Is there a cost?

Some lenders charge an extra home loan fee to access offset or a higher interest rate may apply to the loan.

Online redraws are generally free but there may be a fee for redraws carried out at a branch or using phone banking.

How can I withdraw/spend money?

Generally the same way you would with any other transaction account (e.g. using a debit card).

Via bank transfer from your home loan account to another bank account (you won’t be able to use a debit card).

Are there limits on how much interest you can save?

No, if it’s a 100% offset account. But some loans only offer ‘partial offset’.

Usually not on a variable rate home loan, but extra repayments may be limited if available on a fixed loan.

Are there limits to how much I can withdraw?

No, you can withdraw any funds up to the balance of the account.

Generally not, but some fixed loans have limits on how much extra you can pay and therefore have available to redraw.

Main advantage

Flexibility to easily use the money in the account as it works like any other transaction or savings account.

You’re actually reducing your debt through the extra repayments while still being able to access that money.

Main disadvantage

There are sometimes higher interest rates on home loans with an offset account.

Not as easy to access your money.

Which is better: Offset or redraw?

We asked two experienced mortgage brokers about which kinds of borrowers are better suited to an offset account vs redraw.

“Both features behave in the same way – they reduce your interest costs however they may or may not suit you depending on your financial habits,” explains Money’s home loans expert and mortgage broker Mansour Soltani.

“We typically tell our clients that a redraw facility is good value for an owner-occupier loan. This is because it’s usually free with a home loan account.”

Consider offset for an investment property

Mansour Soltani home loan expert

Mansour Soltani , Money's home loan expert

"An offset account allows you to withdraw funds for personal use, without it impacting any home loan interest tax deductions. On the other hand, accessing money through redraw may limit your ability to claim tax deductions. Always speak to your accountant or financial advisor to fully understand the tax implications based on your situation."

Mansour Soltani , Money's home loan expert

Mortgage broker Rebecca Jarrett-Dalton of Two Red Shoes says she recommends looking at your existing banking habits before deciding whether an offset account or redraw will be better.

“We ask clients how do you bank, how do you save, what do you do with your money? Then we try and match their good banking habits to a loan that's going to suit them,” she explains.

Rebecca says in her experience, people who use one account for all their banking and have bills and payments automated may prefer the convenience of an offset account.

For people who are happy to manually move their money around, a redraw option might be enough.

“That way, they don't incur the offset account fee, because 90% of loans that have an offset will come with a package fee.”

Look at your savings balance when deciding which is best for you

Rebecca Jarrett-Dalton

Rebecca Jarrett-Dalton, mortgage broker

"There's not much point in people taking a loan with offset unless they're going to keep a reasonable amount of cash regularly in that account. The exception is if you get multiple offsets with no extra charge. You may as well go with that option because every little bit helps."

Rebecca Jarrett-Dalton, mortgage broker

Home loans guides & resources

What's the next step on your property journey? Our home loan guides will help you navigate the road ahead, whether you're buying, building or looking to save on an existing loan.

Common questions about redraw vs offset

When considering how secure your money will be, it’s important to remember that offset and redraw features involve using your cash in very different ways.

With offset, you hold onto your savings in a separate deposit account. With redraw, you pay extra on your loan to reduce your debt, but you can access that money again if you need it. However, a redraw facility is not a deposit account, meaning that money is not protected in the same way.

Here’s how financial services regulator APRA explains it:

'Mortgage offset accounts that are separate deposit accounts are covered under the FCS [Financial Claims Scheme]. However, mortgage accounts with redraw facilities that are not separate deposit accounts are not covered by the FCS.'

The Financial Claims Scheme covers customers for up to $250,000 per person per institution on money deposited with an authorised deposit-taking institution (ADI). That means if you have up to $250,000 in an offset account and your bank goes bust, the government will guarantee that money provided its held with or backed by an ADI.

Most home loan providers either are an ADI themselves or their offset accounts are backed by one, meaning you would also be covered. Check this with the lender or your mortgage broker if you’re unsure.

In the case of redraw, you can’t ‘lose’ the money you have made in extra repayments. But there is a small risk it could be fully absorbed into your loan (e.g. if you stopped repaying your loan), meaning you would no longer be able to access the money.

As Rebecca explains, “it's not going to leave you with a loan and no money – it's going to leave you with a smaller loan".

Yes, some home loans (usually variable rate ones) offer both an offset account and the ability to make extra repayments and then redraw them.

That would mean a borrower could make extra repayments on their loan to reduce their debt, while also keeping their savings and other cash on hand in an offset account to reduce their interest bill.

Sean Callery is the Editor of Money.com.au. He has over 15 years of international experience. He is qualified with a Certificate IV in Finance and Mortgage Broking (FNS40821) and is compliant to provide general advice in Tier 1 General Insurance (RG 146) products.

Megan is a finance writer with more than 10 years of experience in the industry. She’s passionate about helping people make sense of financial topics and principles. She's certified in Finance & Mortgage Broking and is compliant to provide general advice in Tier 1 General Insurance.

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