What is the difference between offset and redraw?

What is the difference between offset and redraw?

It might seem hard to place the differences between offset and redraw. After all, both are a means for you to get ahead with your mortgage and also have a certain level of flexibility to access your money. When you look at it more detail, though, their differences become apparent. 

Disclaimer: The information contained in this article is of a general nature only and should not be taken as financial or legal advice on any of the topics discussed. Always consult a financial adviser before making any investment decisions.

Making the choice between offset and redraw will come down to how you manage your finance, how you want to utilise the available money and other considerations, such as tax. 

In this article, we break down the differences between the two, and how they can help you pay off your loan sooner.

What is an offset?

You can think of an offset facility in a similar way to a normal transaction account. Offset is a deposit account attached to your home loan that behaves exactly the same way, but with the added bonus of reducing the amount of monthly interest you pay on your home loan.

Money can be transferred in and out of an offset facility to pay everyday expenses and bills. They will also come with a debit card so that you can withdraw cash from an ATM. Unlike regular savings accounts, an offset account doesn’t earn its own interest.

What is a redraw?

A redraw may not have the same degree of flexibility that an offset account has, but it is still a very valuable way for you to get ahead on your home loan.

Another thing which sets redraws apart from offset facilities is that it is not a separate account. If you have monthly loan repayment of $1,500, but you are paying $2,000 each month, you will have $500 above your required repayment which is available to withdraw from your loan at a later date. These extra repayments go towards principal and interest, meaning that any amount paid over your required repayment chips away at your loan’s lifespan, which means you will also pay less interest too.

As there is no associated account with the redraw, it will take more time to access these extra repayments. Even though you can transfer out of a redraw, you might have to apply to your lender and there could be minimum amounts you can withdraw at any given time. You may also be charged a fee by your lender for this.

A redraw could be a great way for you to put aside some money for a big expense, such as paying off other debt or completing home renovations.  

Things to consider

Is your offset full or partial? 

It is worth checking to see whether your offset is full or partial. If you have a partial offset, only a portion of your interest will benefit from your offset balance. This usually happens when your loan is split between fixed and variable rates.

Are you splitting your loan?

As a rule of thumb, 100% offset is only available on loans with a variable interest rate. If any portion of your loan is on a fixed rate, your offset balance will not affect the fixed portion. It may be something to consider, if you’re thinking about fixing a portion of your loan. Splitting your loan could affect your offset, so it is worth checking in with your lender to ensure they offer offset on fixed rate loans as well as variable.

Are there tax implications?

Short answer: yes! There may be tax implications if you withdraw money from your redraw on an investment loan. You may not be able to claim any portion of your loan that you redraw for a non-investment purpose, such as going on holiday or buying a new car. Any withdrawals from an offset account, on the other hand, won’t affect interest deductibility. 

Are there any extra fees to consider?

It is possible that you may be charged a fee when you redraw money or you may be charged an ongoing fee for the offset account. If your loan has an offset account you may also end up paying a higher interest rate, so be on the lookout for lenders and home loans which offer no-fee or low-fee options. 

How much money could I potentially save?

Both offset and redraw have the potential to save you a lot of money. 

Even small additional repayments or a low offset balance can shave years off the life of your loan. Remember it is always worth getting financial advice if you’re not sure which way to go.

Thinking about reviewing your home loan?

Before making any decisions on the type of home loan situation that is right for you, we’d recommend that you book in a free home loan health check today! Our home loan specialists can help you weigh up the pros and cons. No strings attached. No obligations. 

At Teachers Mutual Bank, we know essential workers are vital to our future, that’s why we’re looking out for theirs. Take a look at our home loans, with great discounts and benefits for you.