Offset vs Redraw – The Never Ending Debate
Choosing between a mortgage offset account and a redraw facility can be confusing, and each has unique benefits and potential drawbacks. Let’s break down what these options mean and how they can affect your home loan.
What is an Offset Account?
An offset account is a transaction account linked to your home loan, allowing you to reduce the interest on your mortgage. The balance in your offset account directly reduces the principal amount on which interest is calculated.
What is a Redraw Facility?
A redraw facility is a feature in your loan that allows you to make extra payments on your mortgage and later withdraw those funds if needed. While it can help reduce interest on your loan, it doesn’t function like a daily transaction account.
PROS & CONS OF BOTH
FEATURE |
OFFSET ACCOUNT |
REDRAW FACILITY |
| Pro 1 | Reduces Interest Costs: Every dollar in an offset account reduces your mortgage balance, lowering interest paid. | Extra Repayment Flexibility: You can make additional repayments to reduce your loan balance and save on interest. |
| Pro 2 | Full Access to Funds: An offset account functions like a regular account, offering easy access to funds at any time. | Helps with Discipline: Accessing funds from a redraw facility usually takes extra steps, discouraging impulsive withdrawals. |
| Con 1 | Account Fees: Many offset accounts come with maintenance fees, which can add up over time. | Access Limitations: You may face withdrawal restrictions, such as minimum amounts and limited frequency of redraws. |
| Con 2 | No Interest Earned: Funds in an offset account do not earn interest, unlike a high-interest savings account. | No Government Guarantee: Funds in a redraw facility are not protected by APRA’s $250,000 guarantee, unlike an offset account. |
KEY CONSIDERATIONS
- Offset is a Separate Account: An offset account is a separate transactional account, while a redraw facility is a feature within the loan.
- APRA Guarantee: The APRA guarantee, also known as the Financial Claims Scheme (FCS), is a government-backed protection in Australia that covers deposits up to $250,000 per account holder, per bank. This means if an authorised deposit-taking institution (like a bank) were to fail, your eligible deposits (such as those in savings accounts or offset accounts) are protected up to this amount. However, this guarantee does not apply to redraw facilities, which are part of a loan rather than a separate deposit account.
WHICH ONE SHOULD YOU CHOOSE?
Both offset accounts and redraw facilities have benefits, but choosing the right option depends on your financial habits and goals. If you need easy access to funds and want full APRA protection, an offset account might suit you best. On the other hand, if you’re focused on paying down your loan and don’t mind less liquidity, a redraw facility can offer similar interest-saving benefits with fewer temptations to withdraw.
Disclaimer: This is general information only and should not be acted upon without professional advice.