Offset beats redraw – find out why…
Redraw facilities and offset accounts are similar in many ways. On first glance, the differences only present very small, but in reality they are a lot larger than you first might think.
What do we have in common?
Both redraw and offset facilities:
are designed to help reduce the amount of interest you pay on your home loan facility (mortgage)
can help you pay off your home loan faster
are typically available on most standard variable home loans
Understanding the differences
An offset account is a separate deposit/transaction account, that operates in parallel to your home loan. Think of it as savings bank account that works harder for you.
In contrast, a redraw facility is not a sperate account, but an add on feature to your home loan account. Using redraw is typically categorised by people with Basic or Simple home loan products.
So in the case of the offset you will be saving interest by putting more money into your offset account, whereas to use redraw you would be paying extra money directly into the home loan account itself.
The differences seems slight, but this is where the offset account has numerous real world benefits:
Familiar banking – using the offset account is exactly the same as using a traditional savings or transaction account (you can even have a debit card directly linked to this account with most lenders)
Offset accounts are More flexible
Definitely not financial advice but the offset account is significantly better at dealing with taxation implications when compared to using redraw. And the counter to that is that if you’re owner occupied, tax doesn’t matter. Maybe so, but its extremely common for an Owner Occupied property turn into an investment property later down the line, and if you were using redraw its likely had some significantly negative tax implications to your situation. The same person running an offset account through the same period wouldn’t be facing such a problem.
By it’s very nature of operation, the offset account is quarantined. It’s happened before, and my worry is that it will happen again, access to redraw funds have been taken away from clients without notice. Even as recent as early 2020, there was very highly publicised instance where a bank removed their customers access to redraw funds in an instant, not mentioning any names…. Cough “google me”
But a basic home loan is cheaper right?
In reality, probably not – I really don’t like the way media and review sites quote interest rates as a “Comparison Rate”.
A Comparison rate = $150,000 loan over 25 years. I mean c’mon; how many Australians in 2023 have a $150,000 mortgage ran over 25 years. We are running different races people!
It’s always important to reflect and understand that everyone’s situation is different, so its always hard to talk in absolutes when it comes to home loan lending and mortgages.
Understand the limitations of the product offering, then work out what is important to you and probably don’t listen to your friend at your next dinner catch up, unless of course they really know what they’re talking about – which will be you after reading this after!
