Offset Account & Redraw
Offset accounts are essentially the same as a normal bank account, except that the money in the offset account also reduces the interest you pay on your home loan as if you had paid that money into the home loan itself. The upside is that you can take this money back out whenever you like, and use it flexibly for other purposes when you need it, and while you don’t, it’s sitting in the offset account saving you tens, hundreds, thousands of dollars a year.
Redraw facility on the other hand allows you to pay extra money to your home loan beyond that of your monthly installments. You would usually do this to cut costs on the interest of your home loan, but you can withdraw this extra paid money if your circumstances change. This gives you the flexibility to pay extra when you can but withdraw the extra money when your situation changes and you need the money back.
Offset accounts and redraw facility are different in that one acts as a normal bank account and the other is just a feature on top of your account. Both act similarly in the sense that they use your savings or extra disposable income to help you decrease the overall interest rate of your home loan. However, it’s important to note that redraw facilities are inherently less flexible than an offset account, and sometimes will come along with minimum withdrawals or associated redraw fees. The major advantage of a redraw facility is that it can be useful in reducing the length of your loan’s lifetime, whereas an offset account
Finally, there may be tax implications associated with the use of an offset vs redraw account. Long story short, money put into a redraw facility counts as having paid down part of that loan. If the loan purpose changes to investment, the consumer may not be able to withdraw those funds for non-investment purposes later, including personal use. An offset account, however, is different, in that funds are not beholden to the loan purpose. Ultimately, an offset account holds more flexibility than a redraw facility, but generally has stricter requirements to be available on a loan account. Finally, both offset and redraw are less often available on fixed-rate loans, with some notable exceptions.
Information Disclaimer:
Any advice provided is general and does not take into account individual objectives, financial situation and needs. All individuals should consider whether the advice is suitable for them and their personal circumstances.
