Understanding Offset Accounts and Redraw Facilities
- Mortgage Insights
- Jul 5, 2023
- 3 min read
Updated: Apr 1
Two common features of a home loan are offset accounts and redraw facilities. What's the difference between them, and how do they work?
To help unravel the confusion between the two, let’s explore the details of an offset account and a redraw facility.
Offset Accounts
An offset account is a transaction account linked to your home loan, functioning like a regular savings account where you can deposit and withdraw funds. The key benefit is that the balance in your offset account reduces the amount of your loan on which interest is calculated.
For example, if you have a $500,000 loan and $50,000 in an offset account, you’ll only be charged interest on $450,000. Some offset accounts provide 100% offset, meaning the full balance offsets the loan, while others may offer only partial offset benefits.
Offset accounts provide several advantages. First, they help reduce the amount of interest paid over the life of your loan. Second, they offer instant access to funds, making them highly flexible for those who need liquidity.
Additionally, offset accounts are particularly beneficial for variable rate loans and, in some cases, can be linked to fixed-rate loans.
Redraw Facilities
A redraw facility is built into your home loan and allows you to withdraw any extra repayments you have made. Unlike an offset account, it is not a separate account but part of your mortgage structure.
With a redraw facility, you can make additional repayments toward your home loan to reduce interest costs. If you later need access to those extra payments, you can withdraw them via the redraw facility.
However, there are some considerations to keep in mind.
Redraw requests may take a few days to process, as opposed to the instant access offered by an offset account. Some lenders charge fees for redrawing funds, and there may also be restrictions on the minimum amount you can withdraw.
Choosing the Right Option - Offset Accounts & Redraw Facilities
When deciding between an offset account and a redraw facility, consider your financial goals and circumstances. If you want immediate access to your money while still reducing interest payments, an offset account may be the best choice. If your goal is to make extra repayments and reduce your mortgage faster but still retain access to those funds if needed, a redraw facility could be a suitable alternative.
Why Property Investors Prefer Offset Accounts
For borrowers who plan to rent out their property in the future, an offset account has significant tax advantages over a redraw facility.
If you have savings in an offset account, those funds reduce the interest charged on your home loan while they remain in the account. However, since the loan balance itself doesn’t change, if you later decide to withdraw the money for personal use, your entire loan amount remains tax-deductible when the property becomes an investment.
Conversely, with a redraw facility, any extra repayments you make directly reduce your loan balance. If you later withdraw those funds for personal use, that portion of the loan is no longer considered investment-related, reducing your tax-deductible loan amount. This makes an offset account the smarter choice for those who may convert their home into an investment property in the future.
Key Takeouts
In summary, understanding the differences between an offset account and a redraw facility can help you optimise your mortgage strategy whether you are an property investor, home owner or both.
If you're considering a home loan and want expert guidance on the best structure for your financial goals, speak with a Home Loan Specialist at Fairlane Finance. Our team can help you find the ideal loan solution tailored to your needs.