Redraw facilities and offset accounts have many similarities. But there are some important differences too.

The similarities

Alright, let’s break this down. Both offset accounts and redraw facilities:

• can help reduce the amount of interest you pay on your home loan
• can help you pay off your loan earlier
• are generally available on most standard variable loans

The differences

An offset account is a separate deposit account. You can have your employer deposit your salary into it and you can transfer money in from other accounts. If you want, you can use your offset account for everyday spending like groceries and bills by using a debit card.

By contrast, a redraw facility is not a separate account but a feature attached to your loan. It allows you to draw back additional payments (the amount above your scheduled payments) you have made on the loan. A redraw facility may not be as flexible as an offset account. For example, you may not have the option to redraw money from an ATM or transact using a debit card. Some lenders may set minimum redraw amounts.

There may be different tax implications with using your redraw feature and offset account if you decide to rent out your home in the future.  If you decide to rent out your home as an investment property, the interest charged on the loan may be tax-deductible. But you may not be able to claim any portion of the loan you have redrawn from your redraw facility for non-investment purposes like a holiday or a private car.

On the other hand, withdrawing amounts from your offset account won’t affect the tax-deductibility of interest charged on your loan. If there is a possibility that your first home could one day become an investment property, we suggest you seek financial advice on the best way to reduce interest on your loan by using a redraw or offset account.

Remember that everyone has their own spending and saving habits. What works for one person may not work for everyone.

Both offset and redraw can work together

Many people use both offset accounts and redraw facilities. For example, you might consider making an extra repayment into your home loan each month. Plus, you might choose to use an offset account as your transaction account where your salary is deposited.

Both your offset account and redraw facility may help to reduce the amount of interest you pay on your home loan. They could also help you pay it off earlier.

Decisions, decisions…

Weighing up the best way to manage your finances and home loan depends on a range of factors. Everyone’s circumstances are different.

It’s a good idea to talk to your lender about options for managing your loan repayments. But it’s also a good idea to talk to a trusted financial advisor on how to best manage your finances.

To sum up

• Offset accounts are like everyday transaction accounts, giving you easy access to your money.
• Redraw facilities let you access extra repayments that you have made on your home loan.
• Both can help reduce the amount of interest you pay on your home loan.
• How you use them depends on your circumstances and how you prefer to manage your finances.
• There may be different tax implications for offset and redraw if you decide to rent out your home.