Offset accounts and redraw facilities work in similar ways. They both allow you to reduce the balance of your home loan, and therefore the interest charged, by applying extra money to your debt.
Deciding between an offset account and a redraw facility on your home loan largely depends on how accessible you need your extra money to be.
Redraw facilities
Redraw facilities allow you to deposit spare income into your home loan account, allowing you to redraw a sum equal to the extra repayment amounts in the future.
In the meantime, the extra money paid will lower the amount of interest charged, while still giving you access to your money.
However, there may be restrictions on how much money can be withdrawn and when.
Most institutions only allow redraw from a variable-rate loan, or with limited access from a fixed-rate loan.
It’s important to find out how a loan’s redraw facility works before taking it on, as the fees and restriction attached might outweigh the benefits of interest savings.
Offset accounts
Offset accounts are like savings accounts that function alongside your home loan. You earn interest on the money in the offset account and you often have a debit card attached for simple withdrawals.
For example, if you’re paying 5% interest on your home loan and earning 2% interest on your offset account – with the offset setup, the 2% interest that you earn is coming off the interest you are paying on your home loan.
With 100% offset accounts, you earn interest equal to the interest you are paying on your loan. Rather than earning savings account rates, you are earning home loan account interest rates on the money held within the offset account.
For example, you have $10,000 in your 100 per cent offset account. Instead of paying interest on your $100,000 loan, you are only paying interest on $90,000.
Offset accounts, like many savings accounts, often come with account fees, but the fee may be worth the interest savings and the added flexibility compared to redraw facilities.