Offset vs Redraw

If you've ever looked at a home loan and seen the words "offset account" and "redraw facility", you're not alone in wondering what the difference actually is. They both help you reduce interest and both give you access to extra funds - but they work quite differently.

Offset

An offset account is a separate savings account linked to your home loan. Any money sitting in it is deducted from your loan balance before interest is calculated. So if you have a $500,000 loan and $50,000 in your offset, you're only paying interest on $450,000. The money is also readily accessible, just like a regular bank account.

Redraw

A redraw facility lets you make extra repayments directly onto your loan and then access those funds later if you need them. The difference is that the money is technically part of your loan, so accessing it can sometimes be a little clunkier, depending on your lender.

Monthly repayment

Crucially, it is important to understand that your minimum monthly repayment does not automatically change in either scenario. How the repayment is broken up into principal and interest is what shifts, depending on what the balance is throughout the month.

summary

For most borrowers, an offset account (or more than one) offers more flexibility - especially if you're parking a salary or savings in there regularly. Redraw tends to suit people who want to aggressively pay down their loan and only dip back in as a last resort.

The good news is many loan products now offer both, so you don't always have to choose and perhaps the real answer is: you should utilise both!