Redraw vs Offset

Many home loans today will offer customers the ability to access an offset account or a redraw facility. These are both flexible features which can potentially provide significant financial benefits for home-owners.

But what are offset and redraw? How do they work?

If it came to a choice, is one preferable to another?

Let’s explore offset accounts and home loan redraw.

Redraw vs Offset Explained

Firstly, let’s start by explaining exactly what we mean by offset and redraw, because the two, while being similar in some aspects, are different in others, and can be better suited to people with differing financial circumstances.

What is offset?

An offset account is a transactional, or everyday account that is linked to your home loan with the same institution. Speaking generally, it functions just like any everyday account – you can deposit and withdraw funds as needed, and buy things with your money if you have the option of a linked debit card.

What is redraw?

When we talk about redraw, we are referring to accessing funds that you’ve repaid towards your home loan in excess of your minimum repayment.

Essentially, you’ve paid more than your lender has required you to, and you are able to redraw from the amount you’ve overpaid.

Keep in mind, though, you can only redraw funds equal to the amount you’re ahead on your loan – you can’t withdraw funds from the repaid loan balance itself.

Difference Between Offset and Redraw

• The main difference between offset and redraw is that one is an account and one is simply a feature of your home loan. From a product perspective these are very different.
• The main similarity that they share is that they both provide customers with the ability to make significant savings over the life of their loan by reducing the interest they pay.

Offset Account – Main Benefits

With an offset account, the main benefit of the product is that any money that you keep in the account will be ‘offset’ against your remaining loan balance.

This effectively means that the higher the balance of your offset account, the lower the remaining loan balance your lender will calculate your interest payable on.

What’s more, if you do need to access the funds in your offset account, you can generally do so at any time, as they offer the ease and convenience of an everyday account.

Offset Account - Drawbacks

Keep in mind that there are offsets, and then there are offsets – some lenders allow full offset, which allows the full account balance to be taken into account, whereas some only offer partial offset, which uses a percentage of the offset balance to calculate interest payable on a home loan.

Greater Bank | Mozo Expert's Choice Home Lender of the Year - 2022

How Offset Works

As an example, let’s say you had a full offset account with a balance of $15,000, and a home loan with the same institution with a remaining balance of $400,000.

• Due to your offset balance, you would only have to pay interest on $385,000, instead of the full remaining balance.
• Over the course of a 25-30 year home loan, this could potentially lead to some real-world savings.

Redraw – Main Benefits

Even though redraw isn’t actually a separate product, but rather a feature of your home loan, a loan that features redraw gives you the benefit of making additional repayments.

By doing this, just like with offset, you’re able to lower the loan balance that you’re regularly charged interest on, potentially leading to paying off your home loan sooner, at a lower cost.

Depending on your lender, accessing your funds that you’ve paid in excess of your minimum repayments via redraw is usually pretty simple, and can be done via online banking or in branch.

At Greater Bank, redraw is free online and can be done at any time via online banking or our award-winning app.

Redraw – Drawbacks

Depending on who your home loan is with, or even the type of loan, redrawing is not always a simple process. Some lenders won’t offer redraw facilities on all loans, and some will make it so that redraw is not a simple online process, and you may have to wait a day or two before getting access to your redrawn funds.

Also, some lenders may charge a fee for redrawing from your home loan, while some may enforce a minimum redraw amount or even place a limit as to how frequently you can redraw funds.

How Redraw Works

Let’s say for argument’s sake you had a home loan with a balance owing of $360,000, with a monthly minimum repayment of $1,470.

• If you chose to make a larger monthly repayment, let’s say $1,600 per month for 12 months – then after 12 months you would be ahead on your home loan by $1,560 (12 X $130).
• This is the amount of money you’re able to access via redraw.
• Similarly, if you made a large one off payment to your loan of $10,000 over and above your minimum repayment amount, you would be able to redraw from that $10,000 overage.

Mortgage Redraw vs Offset: Applications

So, how might someone use these two differing options?

Both offer the advantage of allowing home loan customers to paid back the loan balance they’re charged interest on, making significant savings

However, your individual preferences may impact whether you opt to go for a home loan which includes access to an offset account or a redraw facility.

• If the most important thing to you is being able to have instant access to your funds, offset may be worth looking into. The nature of it being an everyday account with the possibility of a linked debit card means that the money you keep in the offset account is yours to spend or save when you see fit.
• If you prefer the prospect of being able to make extra repayments on your home loan, a loan with a redraw facility might be better suited. If your lender allows easy online redraw at no charge – so much the better. If not, and you only plan to activate redraws infrequently, or in larger amounts for big projects, like home renovations, this is something that you may consider.

Redraw At Greater Bank Today

At Greater Bank, we believe that our customers should be given every incentive to repay their home loans sooner – after all, it’s the home you wanted, not the home loan, right? That’s why we feature free online redraw facility on all of our home loans.

If you’re weighing up your options when it comes to offset vs redraw, or are ready to start a conversation with an expert lender about your next steps in the property market, leave us some details via our home loan enquiry form and we’ll be in touch.