Redraw Facility versus Offset Accounts

What is the Difference

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Should I get a basic home loan or a package home loan?

When considering whether you need a simple redraw facility versus a more expensive offset account option, there are several factors to consider. In this article, we will explain what a redraw facility is, what an offset account is, how they both work, and how they can best work for you.

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What is a Redraw Facility?

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A redraw facility is a feature of most basic home loans. It allows you to  access any extra payments you’ve made beyond your minimum required repayments. Essentially, you can reduce your interest charges by making extra payments, which decreases the balance of your loan for the duration that those extra payments are held. You can then withdraw those extra funds if needed. Unlike an offset account, the extra repayments are kept directly in your home loan account, and not in a separate bank account.

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Most basic home loans have a redraw facility, often with a slightly lower interest rate compared to loans with an offset account. While most lenders don’t charge fees for using a redraw facility via online banking, some may apply charges for accessing it over the phone or in branch.

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How Does an Offset Account Work for Home Loans?

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An offset account helps you reduce the interest payable on your home loan by keeping funds in a separate, linked bank account. Your loan interest is calculated on the balance of your loan, minus the amount held in your offset account. For example, if you have a home loan of $500,000 and $100,000 in your offset account, your lender will charge interest based on $400,000. This can result in significant savings over time. Most lenders will provide you with a debit card attached to your offset account, which works great for people who have their salary paid into their offset account, allowing them to access funds for daily expenses, whilst minimising interest on their loan.

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With an offset account, you also have easy access to your money, the same as a regular transaction account. You can use it for daily expenses, set up direct debits, or pay bills via BPAY, and other features you might normally use, all while reducing your interest costs. Most lenders require a “package loan” to access an offset account, which typically involves an annual fee—usually around $395, but does vary. This annual fee entitles you to offset account (and sometimes multiple offset accounts with some lenders), a discount of 0.15% off the lenders advertised rate, and often they waive their annual fee on their credit card should you apply for one as well.

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Which Option is Right for Me?

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At Hello Home Loans, we generally only recommend a basic home loan for borrowers who are owner-occupiers and who never intend to have any investment debt, whether that be an investment property or investing in other assets such as shares or bonds.

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We also take into account whether you typically keep enough funds in your offset account to justify the cost. For borrowers who only maintain a few thousand dollars in their offset account, the fees may outweigh the interest savings, making it more expensive to have the offset account than the benefits it provides.

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If you are an owner-occupier right now but plan to turn your property into an investment property, purchase a new property for investment purposes, or invest your money elsewhere, we usually recommend you have an offset account. This is because of the tax implications that can arise from using a redraw facility versus an offset account.

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Everyone’s financial position is different so it is best to speak with one of our experts so we can determine the right loan structure for you.  
We also highly recommend speaking with a qualified tax accountant and financial planner to get specific advice around investing and tax. At Hello Home Loans, we work closely with several professionals, including your accountant, to tailor the structure of your home loan products to suit your needs.

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Ready to Get Started?

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If you’re unsure which option is best for you, let us help! Contact Hello Home Loans to speak with one of our mortgage experts. We’ll work with you to find the right loan structure that meets your financial goals and helps you get the most out of your home loan.

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