Are you looking to get your foot on the property ladder and make the jump from being a renter to an owner? That’s great!
But don’t forget that there are hundreds of different pathways you could take, especially when it comes to managing your home loan. From choosing which lender to picking between redraw vs offset — where do you even start?
Don’t panic; we’re here today to discuss both options in detail. Let’s roll up our sleeves and find out which one between an offset account vs redraw facility is better when buying your first home!
Redraw vs Offset: what’s the difference?
When it comes to the offset vs redraw debate, differentiating between the two can get heated as they are very similar in how they work and benefit homeowners. They both help reduce the interest you pay on your mortgage.
However, let’s make one thing clear: offset helps you save on mortgage interest through linking accounts, while redraw helps you access funds that you have already paid into your loan.
Let’s investigate their differences further.
What is redraw?
A redraw facility is a home loan feature that allows borrowers to access extra repayments they have made on their mortgage. These extra repayments are often made when a borrower has extra money available (e.g., from a bonus or tax refund) and are used to pay down the principal of the loan faster.
If you pay off more than the required monthly minimum on your home loan, this extra money will accumulate over time. When redrawing on home loan, a borrower can use their extra payments for things like unexpected expenses or home renovations.
What is offset?
An offset account is a type of transaction account that is linked to a home loan. The balance of the offset account is used to offset the balance of the home loan, reducing the amount of interest that the borrower is charged on the loan.
For example, if a borrower has a home loan of $300,000 and an offset account with a balance of $50,000, the borrower would only be charged interest on $250,000 ($300,000 – $50,000) of the loan. This can result in significant savings on interest charges over the life of the loan.
The borrower can still access the money in the offset mortgage account. They can also make transactions as they would with a normal transaction account. The offset account is linked to the loan, and the interest is calculated on the net balance of the two accounts, which is the loan account minus the offset account.
Redraw facility: PROS and CONS
| PROS | CONS |
|---|---|
| 1. A redraw facility allows borrowers to access funds they have already paid into their loan account. This means that instead of being locked away, the extra payments are available when needed. | 1. If you withdraw money from the redraw facility without making an additional payment first, then you will still be charged interest on that amount – even though it was previously part of your principal loan balance! This can increase your overall financial burden and cost more than taking out a separate personal loan. |
| 2. As it is borrowed money, redraw facilities will usually incur no extra fees or charges as long as the loan is repaid in full with interest by the due date. | 2. The majority of redraw facilities only offer access to what has already been paid into the account. It may not be suitable if you need quick access to funds before they are paid in as part of your next repayment instalment(s). |
| 3. It provides flexibility and control over how much and when a borrower can access their additional home loan repayments. | 3. Unless otherwise stated in your contract/agreement with your lender, there will likely be limits placed on how often you can use the redraw facility as well as how much you can withdraw from it at one time. |
| 4. It’s easy and convenient to use; you can usually perform a variety of transactions via your bank account, including making additional payments or withdrawing from your redraw facility using online banking tools such as internet banking or a mobile app. | 4. Banks may also impose minimum withdrawal amounts. It won’t always be so practical or cost-effective — especially compared to debit cards or prepaid cards! |
| 5. It can also be used to top up a home loan if you find yourself in need of some extra cash but don’t want to take out another loan for whatever reason (high interest rates, credit score concerns, etc. | 5. You may also incur significant penalties if you fall behind on repayments. |
Offset account: PROS and CONS
Below is a list of the top offset account disadvantages and advantages.
| PROS | CONS |
|---|---|
| 1. An offset account allows you to reduce the amount of interest charged on your loan, meaning extra savings for you.Any money you keep in the account is used to offset the balance against your home loan and reduce the interest rate applied. | 1. Any money placed into an offset account does not earn interest but rather reduces the amount of interest that needs to be paid on the loan itself. This means there won’t be much return on investment for this type of savings method. |
| 2. You can access your money at any time, without having to get approval from a bank or mortgage lender first. This makes it ideal for those who want to make use of their funds quickly and easily if needed. | 2. The interest rates offered for offset accounts are generally quite low. This means that it may take longer than expected for one’s savings balance within this type of account to grow significantly over time. |
| 3. Money kept in an offset account is not subject to tax like other investments. So any profits gained through it are completely tax-free! | 3. There are fees and charges associated with them – typically a fee for setting up and maintaining the account. These fees can quickly add up over time. |
| 4. An offset account is typically held with a major bank or financial institution, meaning that your money is kept secure by top-level security measures and policies. | 4. Not all banks offer their customers access to offset accounts. If yours doesn’t then unfortunately this isn’t an option available for you. |
| 5. Many banks offer online banking services which allow you to manage all aspects of your offset account finances quickly and easily from the comfort of home! | 5. If you don’t use your offset account regularly, then there’s a chance that some providers might start charging dormancy or inactivity fees (this could range anywhere from $10-$25 per month depending on who’s offering it). |
So redraw vs offset: which one’s better?
If you ask us, we say an offset account is the better option. Why?
It provides more liquidity than a redraw facility, since money can be withdrawn from it at any time without incurring extra fees or charges.
Although both options offer some tax benefits depending on your personal circumstances, an offset account typically gives you more options when it comes to managing and optimising your tax deductions from the loan interest charges incurred. This could provide additional savings against tax payments compared to a redraw facility where such opportunities may be more limited.
Finally, an offset account is separate from your home loan, unlike a redraw facility. This means you get more financial flexibility and control over your loan repayments.
Confused about home loan features? Let Stryve help.
Though both an offset account and redraw facility can help you save on your home loan, it’s important to remember that they work in different ways.
If you’re still undecided about which one is best for you, feel free to reach out to us! At Stryve Finance, we will be able to provide guidance tailored specifically for your financial situation.
