What's the difference between offset

By the resi financial blog team, 03 November 2014

What is the difference between offset and redraw

Home loans come with many facilities and two of the most common are redraw and offset.

Both these facilities let you use any extra cash to reduce your loan balance, while allowing you to access that money later if needed. However, there are some fundamental differences in the way they operate.

Redraw


While a redraw facility lets you make additional deposits into your mortgage account – and then withdraw the extra funds if you need them – in some cases there is a minimum amount you can take out. Although rare, you may also be charged a fee for each redraw.

Offset


Offset accounts are separate facilities linked to loan accounts. They generally earn interest on savings at a rate similar to a regular savings account. The interest that is earned is deposited into your mortgage account and this reduces your loan’s balance – which in turn reduces your interest repayments.

Offset accounts operate as transaction accounts – this means you always have access to your funds. There are also tax benefits: you are not taxed on the interest earned that goes towards reducing your loan account as you never get to see it.

Most offset accounts are 100% offset. This means the amount of interest earned is equal to the interest you are paying on your home loan.

How do you choose which facility to use?
The choice between using a redraw or offset facility comes down to how you plan to use it. If you’re unlikely to regularly access the funds then a redraw facility will be more suitable as it discourages regular withdrawals and often has a minimum withdrawal amounts.

For borrowers who want to use the facility like a transaction account – regularly dipping in and out of it and having their salary deposited within it – an offset account would be more suitable.

In all cases, make sure you check out the fees and conditions on both.

Categories: offset account, redraw