Offset Account vs Redraw Feature: Which is Better for You?
If you’re a homeowner in Australia, you’ve likely come across the terms “offset account” and “redraw facility” while exploring ways to manage your mortgage. Both are powerful tools for reducing the interest you pay on your loan, but they operate differently and suit different financial strategies. Let’s dive into the benefits of an offset account compared to a redraw feature so you can make an informed choice.
What’s the Difference?
- Offset Account: A separate transactional bank account linked to your mortgage. The money in the account offsets your loan balance, reducing the interest you pay. You can deposit and withdraw funds freely, similar to a standard bank account.
- Redraw Facility: A feature that lets you access extra repayments you’ve made on your loan. While these extra repayments reduce your mortgage balance and interest, accessing the funds may involve restrictions or delays.
Benefits of an Offset Account Over a Redraw Facility
- Immediate Access to Funds
Offset accounts function like a regular transaction account, giving you instant access to your money. Whether you need cash for an emergency or a planned expense, there are no hoops to jump through.
In contrast, redraw facilities may require formal requests, and some lenders impose waiting periods or withdrawal limits. - Simpler Financial Management
With an offset account, all your money is in one place, reducing the need for juggling multiple accounts. You can deposit your salary, pay bills, and manage expenses directly from the offset account while it works to lower your loan interest.
A redraw facility often works in tandem with your main account, which can complicate cash flow management. - Greater Flexibility
Offset accounts provide unparalleled flexibility. You can deposit or withdraw funds without restrictions or fees in most cases. Redraw facilities, however, may have limitations on how often or how much you can access, and some lenders charge redraw fees. - Tax Advantages
Funds in an offset account do not count as loan repayments, which can be beneficial if you’re considering using the property as an investment in the future. By keeping money in an offset account, you preserve the full deductibility of your loan interest.
With a redraw facility, withdrawing your extra repayments can reduce the tax deductibility of the loan if you switch the property to an investment. - Transparency
It’s easier to track and understand your financial position with an offset account. The balance is straightforward, and the impact on your loan is immediately visible.
A redraw facility, on the other hand, can make it harder to see how much of your loan balance is “extra repayment” versus the original principal. - No Restrictions on Withdrawals
Offset accounts usually come with no withdrawal restrictions, making them a better choice for managing large expenses like renovations or holidays. Redraw facilities may have minimum redraw amounts or limits on the number of withdrawals allowed.
When a Redraw Facility Might Be Better
While offset accounts have clear advantages, there are scenarios where a redraw facility might be a better fit:
- Cost Savings: Offset accounts may come with higher home loan interest rates or additional fees. If you don’t maintain a substantial balance in the offset account, the costs may outweigh the benefits. Redraw facilities are typically attached to basic home loans with lower fees.
- Savings Discipline: A redraw facility can act as a safeguard against overspending. Since accessing funds may involve delays or processes, it helps prevent impulse withdrawals.
- Smaller Balances: If you don’t have significant savings, the interest savings from an offset account might not justify the higher costs. A redraw facility could achieve similar benefits at a lower cost.
- Reduce Repayments: Some lenders allow you to reduce the repayments on your home loan based on the reduced loan balance which can provide a significant cash flow boost.
How to Choose Between the Two
- Your Savings Balance: If you consistently maintain a high balance, an offset account can maximise your interest savings.
- Access Needs: If you need frequent and easy access to your funds, an offset account is the better option.
- Loan Terms: Check with your lender. Some loans offer only one feature, while others include both.
- Future Plans: Consider your long-term goals. For instance, if you might turn your home into an investment property, an offset account offers more tax benefits.
Conclusion
Choosing between an offset account and a redraw facility boils down to your financial habits and goals. If you value flexibility, easy access to funds, and potential tax benefits, an offset account is a strong contender. However, if you’re looking for a lower-cost option and don’t mind limited access to your extra repayments, a redraw facility might be all you need.
Personally, I’m a big fan of offset accounts as it provides so much more flexibility.
Got thoughts or experiences with offset accounts and redraw facilities? Share them in the comments below!
