Skip to main content

Have you come across the terms ‘redraw’ and ‘offset’ while looking for a home loan? Both can play an important role in reducing the amount of interest you pay on your home loan but are often not explained fully to first-time home buyers or those wanting to refinance their home loan.

If you are unsure of the difference, and which might be the best option for you, read on.

What is an offset account?

An ‘offset’ account is a bank account that is linked to your home loan. You can pay money in and make transactions like you would with an everyday transaction account. The benefit of an offset account is that the funds you have in the account are used to offset the balance of your home loan. This reduces the amount of interest you get charged.

For example, if your home loan balance is $590,000 and you have $60,000 in your offset account, the interest will be calculated on $530,000 instead of the full loan balance.

The more money in your offset account, the better!

Different types of offset accounts

Not all offset accounts are the same. 100% offset accounts are common, but partial offset accounts also exist. This is where only a percentage of your offset account balance is used to offset your home loan balance.

Although it is possible to have an offset account linked to a fixed interest rate home loan, it’s most common to find offset accounts available on variable interest rate home loans.

Home loans with an offset account feature often charge annual fees or have higher interest rates. Some offset accounts also charge a fee when a withdrawal is made. Make sure you know all the details and calculate any potential savings versus the charges when deciding if an offset account is right for you.

What is a redraw facility?

‘Redraw’ or a redraw facility is a feature of a home loan and not a separate bank account. It allows you to make additional repayments to your home loan (above your minimum repayment) and you can then withdraw the money if you need it. It can’t be used for everyday transactions – there’s no debit card or ability to set up direct debits.

Like an offset account, the interest on your home loan will be calculated on your outstanding loan balance, which includes any additional payments you’ve made. This means it’s not just the interest that can be lowered. The additional repayments also lower the outstanding balance of the home loan, meaning you could pay your mortgage off sooner.

Types of redraw facilities

Redraw facilities are commonly available on variable rate home loans, with some fixed rate loans offering it too.

Depending on your bank or lender and your loan, there may be fees or a delay in accessing the additional funds you’ve paid into the loan. As always, make sure you’re across all the terms and conditions before committing to a loan.

Decisions, decisions, decisions

So, should you choose an offset account or redraw facility when applying for a home loan? You need to think about which one you will get the most benefit out of, so here's a short comparison:

Offset account

Redraw facility

Accessible transaction or savings account linked to the home loan Make higher repayments to the home loan above the minimum amount to reduce the loan balance
The account balance will reduce the interest charged on the home loan Extra repayments will reduce the interest charged on the home loan
May charge fees or mean a higher loan interest rate May charge withdrawal fees, have a minimum redraw amount, or have a delay in accessing the funds, so not suited to regular spending

If you know you won’t be able to make many extra repayments and you need quick access to your money, then an offset account may be better for you. If you have some savings that you don’t need to access quickly, then consider a redraw facility instead.

If you are still unsure which is the best option for you and your situation, or need further information about home loan options, we’re here to help. Talk to one of our Home Loan Specialists on 13 25 77 or get in touch with one of our Mobile Home Loan Specialists, who can come to you any time - even virtually. If you have a broker, they'll also be able to assist you.

Banking and Credit products issued by Police & Nurses Limited (P&N Bank) ABN 69 087 651 876 AFSL/Australian Credit Licence 240701. Any advice does not take into account your objectives, financial situation or needs. Read the relevant T&Cs, before downloading apps or acquiring any product, in considering and deciding whether it is right for you. The Target Market Determinations (TMDs) are available here or upon request.