Offset and redraw: how they differ and when each helps

Offset accounts and redraw facilities are two common home loan features that let spare money work against your interest. People often treat them as the same thing. They are not, and choosing between them is worth a few minutes of thought.

What an offset account is

An offset account is a transaction or savings account linked to your home loan. The balance in the account is subtracted from your loan balance when interest is calculated. If you owe $500,000 and have $30,000 in a full offset, interest is calculated as if you owed $470,000. Your money stays in your account; you can use it like any other account.

Some offsets are partial, meaning only a percentage of the balance counts. Some loans allow several linked offset accounts. Offset accounts are often available on variable loans and less commonly on fixed loans.

What redraw is

Redraw lets you take out extra repayments you have already made. If your scheduled repayments have you owing $500,000 but you have paid an extra $30,000, you will typically pay interest on the lower balance, and you may be able to redraw that $30,000 later.

The money is part of the loan, not in a separate account. Lenders may set minimum redraw amounts, charge fees, limit how often you can redraw or, in some cases, change or restrict redraw access. Check your loan terms.

When each tends to suit

• Offset can suit people who keep a healthy everyday balance or savings buffer and want easy access to it.
• Redraw can suit people who want to pay the loan down and are comfortable with less immediate access.
• If a loan with an offset costs more in fees or carries a higher rate, the offset needs to save enough to cover the difference.

Questions worth asking

• Is the offset full or partial, and how many offset accounts are allowed?
• Are there fees for the offset or for redrawing?
• Can the lender change redraw access, and how would I be told?
• Are there limits on extra repayments, especially during a fixed period?
• If the property might become an investment later, have I sought tax advice about using offset versus redraw?

Tax treatment can differ between the two if a property becomes an investment. That is a question for a registered tax agent or the ATO, not a general guide.

How Onlend fits

Loan care in Onlend is planned to help you keep an eye on features like these after settlement and let you know when a review could be worthwhile. You choose what to act on.