Property Loan: Redraw Facility vs Offset Accounts

It is the age-old question: do I opt for an offset account or redraw facility on my investment property? 

We strongly believe in providing education and resources to help build your confidence in making financial decisions. The offset vs redraw discussion is one we have with our clients daily. We have put together an easy-to-understand guide with some key information from the Australian Tax Office (ATO).  

It is important to remember an offset account is not necessarily preferable over a redraw facility, or vice-versa. It completely depends on your personal situation and how you wish to set up your loan. Plus – if the loan isn’t set up correctly, it could end up costing you thousands of dollars. 

In short, a redraw facility is: 

• A feature that allows borrowers to make repayments on their home-loan in addition to their standard repayment amount. 
• The additional repayments can be regular or made in bulk. 
• As the additional repayments reduce your overall loan balance, it saves you money on interest. 
• Borrowers have the option to ‘redraw’ these additional repayments later. For example, to purchase a car or to relocate. 
• It is worth noting that you are only able to redraw funds from the additional repayment amounts, and not from your original loan. 

Establishing an offset account means to: 

• Set up a transactional or savings account directly linked to your home loan. 
• This account is used to offset the interest on your home loan, therefore reducing the amount of interest you pay. 
• The interest is charged on your loan minus the cash amount sitting in your offset account. A common number used to exemplify this is a $400,000 loan. If you have $20,000 sitting in your offset account, you will only be charged interest on $380,000 of your loan. Therefore, interest is charged on the reduced amount (total loan – offset balance).  
• Keep in mind that the cash in your offset account is not actually paid toward your loan, but it is used as an offset to reduce your interest.  
• Having an offset account offers flexibility, as the cash is readily available at any time you need it. 

The key differences between offset accounts and redraw facilities are the ease of accessing funds, cash flow, future borrowing capacity, risk management, and the ability to save on interest charges. 

Some things to keep in mind about redraw facilities: 

• Should you need to redraw part or all of your additional repayments, take into consideration your terms: processing times, minimum redraw amounts, and how often you can redraw. 
• If you redraw your additional repayments, you cannot claim them as a tax deduction. 
• This option is less flexible but can offer the following benefits: more equity in your home, no annual fees, and deters you from digging into your savings/readily available cash like an offset account would allow. 

Some things to keep in mind about offset accounts: 

• Every lender is different. Some offer full offset accounts, and others partial – meaning only a part of the offset account balance is taken into consideration. Make sure you understand the terms first. 
• Some lenders offer multiple offset accounts, and others only one. Having multiple offset accounts can benefit those who prefer to manage their finances by purpose. For example, having a separate offset account for a car, one for children’s tuition, and/or one for a holiday. 
• Many offset accounts are offered under a professional package which have annual fees. 

• Fixed home loans don’t usually offer offset accounts. 
• Offset accounts offer flexibility and readily-available cash should you need it – but this also requires a level of discipline. 

So, ask yourself: 

How do I want to structurally set up my loan, and what pros and cons might this have now and in the future? Each individual case requires critical thinking and varies on circumstance. 

If you own or are looking to purchase a property, and would like to further discuss your personal situation, contact us here.