What are offset account and redraw facilities, and how do they differ?
Introduction
When applying for a new home loan or refinancing, you will often come across the terms offset account and redraw facilities. These are popular home loan features that help you save on interest and pay off your loan faster. Although both aim to reduce your loan cost, they work differently and suit different borrowers.
This blog post explains what an offset account and redraw facility are, and how they differ. It also covers tax implications, examples, and tips to help you decide which option fits your financial goals.
Key takeaways
- Offset and redraw facilities both help reduce loan interest and repayment time.
- An offset account links to your loan and offsets your savings against the loan balance.
- A redraw facility allows you to access extra repayments made on your home loan.
- Tax treatment varies between redraw and offset accounts.
- Consult a mortgage broker or financial advisor for advice suited to your situation.
What is an offset account and how does it work?
An offset account is a transaction or savings account linked to your home loan. The balance in this account offsets your loan balance before interest is calculated. You therefore pay interest only on the difference.
Example:
If you owe $400,000 on your home loan and maintain $20,000 in your offset account, the bank calculates interest on $380,000. This lowers the interest payable and helps you repay your loan faster. While an offset account isn’t a deduction on its own, the way you use it can influence the interest you pay and your overall financial position.
To learn what types of income you need to declare, which deductions and offsets you can claim, and the records you should keep for your home loan and related expenses, visit ATO official website.
What is a redraw facility, and how does it work?
A redraw facility is a loan feature that allows borrowers to withdraw extra repayments made beyond the minimum requirement. It provides flexibility to use additional funds for expenses or investments while reducing the overall loan interest.
Example:
If your minimum monthly repayment is $1,000 and you pay an extra $100 each month, you can access the $1,200 total extra payment later using the redraw facility. A redraw facility helps reduce your loan faster while keeping funds accessible if needed.
Choosing the right loan feature is important, but keeping your interest rate competitive over time matters just as much. Learn how to avoid paying the loyalty tax on your mortgage and make sure your lender rewards you for staying, not the other way around.
Offset V/S Redraw: What’s the difference?
Both offset and redraw facilities are beneficial home loan features that can help you save money and repay your loan faster. However, there are some critical differences between the two that you should be aware of before deciding which one is right for you. The table below shows some of the main differences between offset and redraw facilities to consider:
| Offset account v/s redraw facilities | ||||
|---|---|---|---|---|
| Points of difference | Offset account | Redraw facilities | ||
| What is it? | A separate transaction account linked to your home loan. | A feature attached to your home loan that allows you to withdraw extra repayments. | ||
| How does it help you save money? | Reduces the interest payable on the loan balance by offsetting it with the account balance. | The redraw facility lets you pay more than your required loan installment. This directly decreases the total loan amount (principal) and reduces the interest you owe over time. | ||
| Which type of home loan offers it? | Mostly found in variable home loans (but not all) and a much smaller proportion of fixed-rate loans. | Nearly all variable-rate home loans offer this feature. It is less common in fixed loans. | ||
| How can you withdraw/spend funds? | The same way you would use any other transaction account, for example, by making payments with a debit card. | You can withdraw funds from a redraw facility via online banking, making a phone call, or visiting your lender in person | ||
| The maximum amount you can withdraw? | No, you can withdraw any amount up to the account's current balance. | Some lenders let you withdraw almost all your extra payments minus a small amount required to cover the next payment. While others limit how much you can withdraw to up to 80%. | ||
| No. of times you can withdraw funds | You can make unlimited withdrawals from your offset account as long as the account remains linked to your home loan. | The number of times you can redraw funds depends on your lender and home loan agreement. Some may have restrictions on how often you can access funds or charge a fee for each withdrawal beyond a certain limit. | ||
| Benefits of offset account and redraw facility | An offset account helps reduce home loan interest and allows you to repay your mortgage faster. It also offers the convenience of managing everyday finances in one place while lowering your interest costs. | A redraw facility provides flexibility by allowing access to extra repayments when needed. It can help cover unexpected expenses while still contributing to interest savings over time. | ||
| Drawbacks of offset account and redraw facility | An offset account may have higher fees or slightly higher interest rates than standard loans. The balance in the account also does not earn separate interest like a regular savings account. | A redraw facility can come with limits on how much or how often you can withdraw, depending on your lender’s policy. | ||
Tax implications of offset vs redraw facility
Let’s now learn the tax implications of having a redraw facility or an offset account attached to your home loan:
Tax implications of an offset account
Money kept in an offset account directly reduces the interest charged on your home loan. Because you’re not technically repaying or redrawing funds, this doesn’t change the purpose of the loan.
If your loan is for an investment property, the interest charged (after offset) generally remains tax-deductible and the ATO does not view the use of offset funds as new borrowings. For example, withdrawing from your offset account for personal spending won’t affect the deductibility of the interest on your loan.
- If the money is redrawn for investment purposes (for example, buying another property), the interest on that portion remains tax-deductible
- If it’s redrawn for personal use (like a holiday or a car), that portion of the loan loses its deductibility. And if you later convert your home into an investment property, only the portion of the loan originally used for income-producing purposes can be claimed as a deduction.
Tax implications of an redraw facility
A redraw facility works differently. When you deposit extra money into your loan, it reduces the balance, but if you later redraw those funds, it is treated as new borrowing.
This is important because tax deductibility depends on how the redrawn funds are used.
- If the money is redrawn for investment purposes (for example, buying another property), the interest on that portion remains tax-deductible.
- If it’s redrawn for personal use (like a holiday or a car), that portion of the loan loses its deductibility. And if you later convert your home into an investment property, only the portion of the loan originally used for income-producing purposes can be claimed as a deduction.
Speak to our tax team today for tailored advice on offset and redraw tax implications.
Offset vs redraw: Which is better for our home loan?
When comparing an offset account and a redraw facility, the better choice depends on how you manage your money and the type of home loan you have. Your interest rate structure also plays a role in how much you can save, so it’s worth learning about fixed vs variable home loan rates before deciding.
- If your goal is to reduce interest while keeping access to your money for daily use, an offset account is the better choice. It links directly to your loan and offsets your savings against the loan balance. You can access your money at any time, which makes it ideal if you want to manage your income, bills, and savings through the same account.
- If your goal is to pay off your loan faster and you do not need regular access to the extra funds, a redraw facility is more suitable. It allows you to make additional repayments and directly lower your loan balance. This reduces the overall interest you pay and helps shorten your loan term.
Both features use your extra funds to reduce the amount of interest charged, but the difference lies in how easily you can access those funds. Borrowers who are disciplined savers often benefit the most, as both features reward consistent repayments and careful money management.
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Can I use both an offset account and redraw facilities together?
Yes, you can use redraw and offset facilities with your home loan. This arrangement provides benefits, including interest savings and flexible access to extra funds.
Let’s understand this concept better with an example below:
Example:
Let’s consider that you pay an additional $200 monthly for your home loan via a redraw facility. Over a year, this adds up to $2,400 in extra payments that reduce the principal amount of your loan faster and save on interest. You can withdraw this extra amount through the redraw facility if an unexpected need arises.
If you have $30,000 in your offset account, this sum is used to offset the balance of your home loan when calculating interest. So, if your loan balance is $500,000, the interest will be calculated on $470,000 instead, as the $30,000 in the offset account effectively reduces the amount on which interest is charged.
This combination of extra repayments and offsetting can lead to significant savings on interest payments and help you pay off your loan sooner.
Eager to maximise these benefits? ZedPlus is here to help! With our access to a large panel of lenders, we can help you find a home loan that offers both redraw and offset facilities at competitive rates. This way, you can enjoy the benefits of both options and have the flexibility to manage your finances according to your needs.
If you’re planning to sell property in the future, it’s also worth learning about how the 50% capital gains tax discount works in Australia.
Wrap up!
Offset and redraw facilities can help you manage your home loan more effectively, but the right choice depends on your individual goals and circumstances. At ZedPlus, we simplify the process by understanding your needs, reviewing your finances, and recommending the most suitable option based on current market conditions.
With our expertise in tax and accounting , we also guide you through the tax implications of both options to help you maximise your benefits. Whether you want to save on interest or improve flexibility, we are here to assist. Book a call with our team today to make the most informed decision for your home loan.
Offset vs Redraw Facilities FAQs
Is it better to put money in an offset or redraw?
It depends on your financial goals. An offset account is ideal if you want easy access to your funds for day-to-day use while saving on interest. A redraw facility is better if you can afford to leave extra repayments in your loan, helping you pay off the principal faster without needing to access the funds frequently.
What are the cons of using redraw?
The main downside of a redraw facility is limited access to your funds, as it depends on your lender’s rules. Some lenders charge fees for frequent redraws, and withdrawing the extra repayments may affect the loan term, leading to higher interest payments over time if you don’t repay quickly.
How to pay off a $400,000 mortgage in 5 years?
To pay off a $400,000 mortgage in 5 years, you’d need to make significant extra repayments. Consider switching to a loan with offset or redraw facilities to reduce interest over time, and paying as much extra as possible each month. Regularly review your budget and refinance if necessary to get a competitive interest rate.
Is it good to redraw?
It’s good to redraw if you have extra funds in your loan and need access to them for emergencies or investments. However, constantly redrawing can defeat the purpose of making extra repayments and reduce the amount of interest savings over time.
Does using redraw affect credit score?
Using a redraw facility does not directly affect your credit score. However, it’s important to ensure that you make regular repayments and maintain your loan balance to avoid any negative impacts on your financial health, which could affect your creditworthiness over time.
What is the 2% rule for mortgage payoff?
The 2% rule for mortgage payoff suggests refinancing if you can lower your interest rate by 2% or more. This can help you save money and pay off your mortgage quicker, depending on your loan terms.
