Redraw Facility Vs Offset Account

In a world of rising interest rates, borrowers are looking for all the savings they can find. One of the ways to help that tight household budget could be with an offset account, also called an ‘offset facility’. Between November 2021 and March 2023, the number of offset accounts grew by around 10%^.

This guide takes you through what an offset account is, how it works, why you might want one, and what to look out for when shopping for home loans that offer this facility.

Alternatives to an offset account includes opting for a redraw facility. Read more about these here.

What's an offset account?

An offset account, also called a ‘100% offset account’, is a transaction account that is linked to your (usually variable rate) home loan account.

Your lender subtracts the amount in your offset from the principal amount owing on your loan - and then calculates the interest on your home loan.

The amount of money you keep in your offset account offsets the debt you owe on your home. Over time, this pays your loan down faster.

Here’s an example:

• You have a $600,000 home loan at 5% interest.

• Your repayments are $3000 per month, with $500 coming off your principal loan amount each time, and $2500 in interest going to the bank’s coffers.

• Your offset account sits beside your home loan, and holds $10,000 in it.

• Now, you’re paying 5% interest on $590,000. Your repayments are still $3000 per month but now $541 is coming off the principal loan amount, and the bank gets less of your $3000 payment.

• You’re paying an additional $41 per month off the principal amount of your loan, which compounds each month to reduce the amount you owe.

So, next month, your underlying loan amount will be reduced by more than $541, and the following month even more than that, and so on…

Does an offset account reduce monthly repayments?

Not usually. What does happen though, is that more of your loan repayment amount is applied to the principal amount of your loan, and less to the interest. This means you’ll pay less interest rather than less money. It also means that your lender takes less of your hard-earned coin.

What happens when I need to use the money in my offset account?

You’ll have noticed the amount of money in your offset account fluctuates, because you can have all your income going into it, and then you pay your regular outgoings like groceries, power bills, etc.

The interest you’re charged on the days your offset account balance is higher, will be lower than on the days when you’ve spent some of that income.

How?

Your home loan interest is calculated daily, but only charged monthly, fortnightly, or weekly, so you’re still helping yourself by having all your income go into your offset account. Over time, those days where you’re charged less interest dollars, makes a bigger difference than you’d think. Over the course of your loan you can cut thousands off your interest repayments and years off your debt.

How many offset accounts can I have?

Most loans that offer an offset facility allow you to set up multiple offset accounts. They can all be attached to one home loan, and some people use them as ‘buckets’ of savings accounts.

They might have one for kid’s school fees, another for the annual family holiday, and a ‘rainy day’ one. This helps some families budget. That said, loans with multiple offset facilities may charge more fees than simpler structures so check this with your broker.

What is a partial offset account?

Partial offset accounts are usually associated with fixed rate home loans. You can still access your money as usual in a partial offset account.

Your bank offsets only a portion of your total account balance, against your principal loan amount.

In the example given above, a 40% offset would mean you’re paying interest on $596,000 instead of $590,000 because only 40% of the balance held in your account offsets against your $600,000 home loan amount. The 40% partial offset is the most common partial offset offered with fixed rate loans in Australia**.

It’s also possible for a lender to offer a capped amount that they are willing to offset, such as $10,000 per year. So they'll offset the $10,000 in your partial offset account, but if you add more money to that account in a 12 month period, the additional funds won’t be offset against your loan^^.

Banks do this to ensure you don’t pay your loan off too quickly - they make less money that way.

Is a partial offset better than a 100% offset?

Not usually - remember that 100% offset accounts aren’t usually offered with fixed rate loans. If you wish to have an offset account and a fixed rate home loan, a partial offset account may be your best option**.

You may be charged additional fees and/or a higher interest rate for having one though. Again, it’s worth speaking to a broker like Compare Club before you opt for a partial offset account.

What are the pros and cons of having an offset, or a partial offset, account?

The advantage of an offset account is that your money is held in a separate account from your home loan so it’s easy to access at need, while still reducing your interest.

The downside is that there may be a cost for having the offset account, either an account fee or a higher interest rate on your home loan.

How does an offset account save me money? The interest rate on a home loan is generally higher than an interest rate on a savings account. By paying less interest (in our example above), you’re saving 5% interest on the $10,000 you’ve offset.

This is more than you’d earn if you placed the $10,000 into a term deposit at 2%, which not only locks up the money, but attracts income tax on the 2% earnings as well.

That's why many people opt to save money through an offset account: you're reducing your home loan interest but still able to save for new purchases, such as a holiday or a car.

Can an offset account affect my tax?

An offset account is a lot like a savings account. The money in your offset account is still accessible, should it be needed, and it doesn’t earn interest. This means you’re not earning any income from your offset account, so no income tax is payable on this money. It can affect negative gearing tax concessions. This is something you need to discuss with your financial advisor.

Is the money in my offset account taxable?

An offset account isn’t like a term deposit account. It doesn’t earn any income for you, merely reducing your long term costs by saving you interest.

As a result, there’s not usually a tax liability associated with having an offset account. We always recommend checking taxation information with your financial advisor though.

Do all home loans come with an offset account?

Not all home loans have an offset facility; it depends on your lender and your specific loan. Some lenders offer an offset as a free part of your loan account. Others charge an additional fee.

Some terms and conditions to be aware of when comparing loans offering an offset facility, include:

• Fee for accessing the funds in your offset account.

• Fee for having an offset facility on your loan account.

• Monthly restrictions on the number of times you can redraw from your offset account (this may or may not include your regular home loan repayments).

If you don’t think you’ll use an offset account much, you might be better off with a cheaper loan that doesn't offer one. A good broker can help you compare your options here.

Can I withdraw money from my offset account?

Your offset account is linked to your home loan. It has the same features as an everyday transaction account and works in a similar way.

You’re able to withdraw and deposit money at any time. You can have your salary paid straight into your offset account, and this will help reduce the interest you pay by rather a lot.

Are offset accounts a good idea?

When used wisely, an offset account facility can be a useful feature to help you pay your loan down faster, while retaining access to your funds as and when you need them. You can make deposits into your offset without worrying that you won't be able to get the funds back later if you need them.

Leaving money in your offset for as long as possible reduces the amount of interest you pay, meaning you're chipping away at your principal loan amount.

What happens when your offset account is more than loan?

Nothing different happens. The bank doesn’t pay you interest on the excess money. You can, of course, pay out your home loan but if you don’t, your repayments will all go directly towards any remaining principal amount that you owe.

Offset account vs Redraw facility`:

If you're using your partial offset facility to save up for a big purchase, bear in mind that there may be fees attached for adding in more money than your loan says you can.

Another way to reduce the amount of interest you pay is by putting any additional money you have directly into your home loan - and drawing it out when / if you might need it. This is known as a Redraw Facility, and you can find out more about this here`.

What is a Redraw facility?

Some home loans come with a redraw facility. A redraw facility allows you to make additional repayments into your loan account. Unlike an offset account, a redraw facility isn’t a separate account. Your additional payments are made directly into your loan account.This reduces your principal loan amount more quickly, and therefore you pay less interest (because you now owe less money). You’re allowed to access the additional money later on if you need it. Find out more about redraw facilities in our guide here.

For other ways to pay your home loan down more quickly - and save on those interest repayments, check out these broker-approved home loan hacks here. If you like the sound of an offset facility - and many borrowers do - here are some quick questions to ask when comparing home loans:

• Does this loan have an offset facility?

• Are there any fees associated with an offset account?

• Is there a minimum or maximum amount I can hold in my offset account?

• Am I likely to hold enough additional money in my offset, to cover any added fees and charges?

There are plenty of options on the market for home loans with an offset facility, so it pays to shop around. Compare Club’s expert brokers can help you compare offset and redraw accounts, and find you competitive fixed and variable rate loans.

It’s our mission to ensure you’re not overpaying for your home loan, so speak to one of our team today.

This guide is opinion only and should not be taken as financial advice. Check with a financial professional before making any decisions. Compare Club do not compare all products in the market.

*Offset Accounts **Offsets and Partial Offsets ^^Partial offsets ^Offset Usage Grows `Redraw Facilities