Offset or redraw – which is right for me?

Offset or redraw – which is right for me? 

Although mortgage rates will tell you how competitive home loan offers are, it is still vital to check for all-important features which could help you pay off your loan much quicker, such as offset accounts and redraw facilities

Disclaimer: The information contained in this article is of a general nature only and should not be taken as financial or legal advice on any of the topics discussed. Always consult a financial adviser before making any investment decisions.

Both of these two home loan features enable you to use any extra funds you may have to reduce the amount of interest you are paying over the lifespan of your home loan. This is good news for all the diligent savers out there who will benefit the most from these features.

In this article we break down the major differences between the two features, to work out which one is right for you.

Why choose an offset account?

An offset facility operates in a similar way to a high-interest savings account, but one which is linked to you home loan. 

Offset accounts will usually have a debit card with them, meaning that your money can be accessed at ATMs as per a normal transaction account. 

The funds sitting in the offset account get to work by reducing the amount of home loan interest you are paying each month.

Example

If you have a $500,000 mortgage, with $20,000 in an offset account, you’re only paying interest on $480,000.

There are two types of offset: full and partial. One thing to consider with a partial offset is that only a portion of your interest will benefit from your offset balance. This usually happens when you split your loan between fixed rate and variable rate.

If you are a dedicated saver, this home loan feature may be the perfect option for you. 

The perks of a redraw facility

A redraw facility will similarly allow you to make extra repayments on your loan. This type of feature doesn’t offer as much as flexibility as an offset, it can still be a great way for you to get ahead on your home loan. Unlike an offset account, a redraw facility is not a separate account attached to your mortgage.

Here is how it works: if you have a monthly loan repayment of $1,500 but you instead decide to pay $2,000 each month, the extra $500 will go towards your redraw facility, and over time you will be building funds that can be withdrawn from your loan at a later date. The extra repayments you make each month will go towards principal and interest, meaning that less interest will be paid over the duration of your loan.

As there is no associated account attached to your redraw, it can take more time for you to access any of these extra repayments. Even though you do have the ability to transfer out of a redraw, you may have to make an application to your lender to do so, and you may be charged a fee. 

A redraw can be an excellent way for you to stash away some money for a big expense, such as paying off other debt or an upcoming holiday. 

Other things to think about

• If you are splitting your loan: usually, 100% offset is only available on variable rate loans. If any portion of your loan is on a fixed rate, then the balance in the offset won’t affect the fixed portion. If you’re thinking about fixing a portion of your loan, you may want to check with your lender to see how splitting your loan could affect your offset.
• Deductions on your tax: there may be tax implications if you withdraw money from your redraw on an investment loan. You may not be able to claim any portion of your loan that you redraw for a non-investment purpose (such as going on a holiday.) On the other hand, any withdrawals from an offset account won’t affect interest deductibility. 
• Extra fees: you may get charged a fee when you redraw money or you may be charged an ongoing fee for the offset account. You could also wind up paying a higher interest rate if your loan has one of these attached. If either an offset or redraw are important to you, look for lenders and home loans that offer low or no fee options.
• Using both features together: some lenders may let have both an offset account and redraw to make the most of your savings potential.

How much money can I save?

Both of these features could save you a lot of money. Even smaller additional repayments or a very low offset account balance could potentially shave years from your loan.  It is important to get financial advice if you are not sure which of these options is right for you. 

Thinking about reviewing your home loan?

Before making any decisions on the type of home loan situation that is right for you, we’d recommend that you book in a free home loan health check today! Our home loan specialists can help you weigh up the pros and cons. No strings attached. No obligations. 

At UniBank, we know essential workers are vital to our future, that’s why we’re looking out for theirs. Take a look at our home loans, with great discounts and benefits for you.