How redraw facilities and offset accounts can save you money

Understanding Offset Accounts and Redraw Facilities

When managing a home loan, offset accounts and redraw facilities are two popular options that can help you reduce the interest charged by applying extra money to your debt. Both serve similar functions but have distinct features and benefits. Choosing between them depends largely on how accessible you need your extra money to be and your financial habits.

Both options calculate the interest in the same way

1. Your current loan balance eg. $100,000

2. Subtract the balance in your redraw / offset account e.g. $10,000 = $90,000

3. Interest is charged on the $90,000 rather than the $100,000 home loan balance

Interest on your home loan is charged on a daily basis, so as your redraw or offset account balances increase and decrease throughout the month, so does your interest savings.

Redraw Facilities

Redraw facilities allow you to deposit spare income and / or savings directly into your home loan account. This extra payment reduces the principal amount owing on your loan (your loan balance), which in turn lowers the interest charged. You have the flexibility to withdraw these extra repayments later if needed, which is referred to as “redrawing.”

Benefits of Redraw Facilities:

1. Interest Savings: By reducing your loan principal, you save on interest over the life of your loan.

2. Access to Funds: You can access the extra repayments if you need them, providing a safety net for emergencies or unexpected expenses.

Considerations for Redraw Facilities:

1. Withdrawal Restrictions: There might be limits on how much and how often you can redraw. Some lenders only allow redraws from variable-rate loans, with limited access for fixed-rate loans.

2. Fees and Conditions: It’s crucial to understand the specific terms and conditions of a redraw facility. Some loans come with fees for using the redraw feature or may impose minimum redraw amounts.

3. Processing Times: Redrawing funds with some lenders is instantaneous however others could take several days to process. Check with your broker for details on your specific lender.

Offset Accounts

Offset accounts function like savings accounts but are directly linked to your home loan. The balance in your offset account offsets your home loan principal, thereby reducing the amount of interest you pay. For example, if you have a $100,000 loan and $10,000 in your offset account, you only pay interest on $90,000.

Check with your broker or lender to make sure that your offset account offers 100% offset. Some lender may only offer up to 40%. Every dollar in your offset account directly reduces the amount of interest charged on your loan.

Benefits of Offset Accounts:

1. Ease of Access: Offset accounts usually come with a debit card, making it easy to access your money for daily transactions.

3. No Withdrawal Restrictions: Unlike redraw facilities, offset accounts typically do not have withdrawal limits, providing greater flexibility.

It is vitally important to check that your offset account has been linked to your home loan account and continue to monitor that you are receiving your interest savings.

Considerations for Offset Accounts:

1. Account Fees: Offset accounts often have monthly fees, which can add up over time. However, the interest savings and convenience might outweigh these costs.

2. Interest Rates on Balances: While offset accounts reduce the interest on your loan, they typically do not earn interest like traditional savings accounts.

3. Impact on Loan Term: Consistently maintaining a high balance in your offset account can significantly reduce your loan term and total interest paid, potentially saving you thousands of dollars.

Deciding Between the Two

When choosing between a redraw facility and an offset account, consider your financial habits and needs. If you prefer easy access to your money for daily transactions and are comfortable with potential fees, an offset account might be the better choice. On the other hand, if you plan to make extra repayments and don’t need frequent access to these funds, a redraw facility could be more suitable.

It’s also important to compare the specific terms and conditions offered by different lenders. Look at the fees, restrictions, and flexibility of each option to determine which aligns best with your financial goals.

Why not both?

Some lenders offer home loans with both options. You might decide to deposit your ‘strict savings’ amount into the redraw amount for medium to long term savings goals such as a family holiday. You are less likely to want to touch your redraw savings so this can be a good money hack to keep your savings where they are for as long as possible. Therefore you might decide you would like to keep funds that you need to access on a more regular basis in your offset account. 

Pro Tip!

Some lenders will apply your interest savings by reducing your repayment amount. This is useful if your objective is cash flow focussed to keep your repayments as low as possible. However if you goal is to repay your home loan as quickly as possible, rather than paying less each payment and potentially spending these extra dollars, continue you make the same repayments to potentially cut years off your home loan.

Final Thoughts

Both offset accounts and redraw facilities offer valuable ways to save on interest and manage your home loan more effectively. By understanding the benefits and limitations of each, you can make an informed decision that best suits your financial situation and helps you achieve your homeownership goals. Always seek advice from a trusted broker to tailor the best strategy for your individual circumstances.

Check our our Mortgage Offset Calculator here to see how quickly you could pay off your loan with an offset account.

Give us a call today for assistance in applying this savings strategy to your home loan.