Offset accounts and redraw facilities work in similar ways - both allow you to reduce the balance of your home loan, and therefore the interest charged, by applying extra money to your debt.
Redraw facilities allow you to deposit spare income into your home loan account, allowing you to redraw a sum equal to the extra repayment amounts in future.
In the meantime, the extra money paid will lower the amount of interest charged while still giving you access to your money. However, there may be restrictions on how much money can be withdrawn and when.
For redraw, it can depend on whether the facility applies to a fixed-rate or variable loan.
Most institutions allow redraw from a variable-rate loan, however fixed-rate loans may have limited or no access.
It is important to find out how a loan's redraw facility works before taking it on, as the fees and restriction attached might outweigh the benefits of interest savings.
Deciding between an offset account and a redraw on your loan largely depends on how accessible you need your extra money to be.
An offset account is an everyday account which is linked to your home loan account. It works to "offset" your home loan balance daily, meaning you are only paying interest on the difference between your principal loan and the balance in your offset account.
If you have a 100 per cent offset account, you can offset your loan 100 per cent with your transaction or savings account.
The offset account can either be linked to a variable rate loan - which is more common - or a fixed-rate loan.
For example, if you have a home loan balance of $250,000 and you have $40,000 in your offset account, you will only be paying interest for a home loan balance of $210,000.
With a smaller amount to charge interest on, you could save thousands as you pay off your home loan, as interest is only charged on the difference between your principal home loan and the balance in your offset account.
Many people ask - does an offset account reduce monthly repayments?
You will not see the benefits in your monthly repayments, however due to the savings made by reducing your interest, this means you will repay your home loan off at a faster rate.
Offset accounts, like many savings accounts, often come with account fees, but the fee may be worth the interest savings and the added flexibility.
Speak to an accredited finance broker to find a loan that matches your needs and plans.
