Redraw Feature vs Offset Account: Understanding the difference between them
18 Jan 2023
When it comes to home loans, there are a few different features that borrowers can take advantage of to make repaying their loan easier and more manageable. Two of these features are redraw and offset accounts. While both can be beneficial, they work in different ways and are suited to different types of borrowers.
A redraw feature allows borrowers to access any extra repayments they have made on their home loan. These extra repayments can be withdrawn as cash, and used for whatever the borrower chooses, such as home renovations, investments or even paying off other debts. The redraw feature is essentially a savings account linked to the home loan, and can be accessed at any time. However, it’s important to note that a redraw feature may have a minimum amount required to withdraw and some lenders may charge a fee for each withdrawal.
An offset account, on the other hand, is a transaction account linked to the home loan. Instead of withdrawing extra repayments, the funds in the offset account are used to offset the interest on the home loan. For example, if a borrower has a $500,000 home loan and $50,000 in an offset account, they will only be charged interest on $450,000 of the loan. This can result in significant savings on interest charges over the life of the loan. It’s also worth noting that offset accounts can also be used as a transaction account, and can be used for everyday transactions such as paying bills, and can also earn interest on the funds in the account.
Which one is right for you?
Both a redraw feature and an offset account can be useful tools for paying off your loan quicker and save interest. They however work differently and the preference should be based on personal needs. Loans that offer Redraw only are generally slightly cheaper than the variable loans that come with an offset account with most lenders.
It’s important to weigh the pros and cons of each feature and consider your own financial goals and circumstances before deciding which one is right for you. It’s also a good idea to speak with a mortgage broker for guidance before making a decision.