The difference between Redraw and Offset
A common question we get from our customers is, “What is the difference between redraw on the loan OR using an offset accounts”?
Before we get into the difference between the two options, let’s look at what each of them are first.
What is redraw on the loan?
Redraw is a feature of your loan that allows you to withdraw any additional repayments you’ve made on top of your regular minimum monthly repayment.
For example, if your minimum monthly repayment is $3000, however, you have asked the bank to take an extra $1000 a month, then each month your loan will have $1000 in redraw available to you.
If you keep going at this rate, in 6 month’s time, you’ll notice that your loan will show an “available balance” in credit of $6,000. This is because you’ve been making an extra $1000/month for the last 6 months ahead of your regular repayment schedule.
The redraw feature allows you to access and withdraw this money when you need it. This creates flexibility in the event that you might need access to the extra money you’ve paid into your loan.
This feature is usually available on all variable loans, however is only available on very few and select fixed rate loans. There is also usually no fees for accessing redraw as long as you transfer the available redraw money from your loan account to your everyday account via internet banking.
If your loan is P&I, accessing your redraw generally will not affect or change your minimum monthly repayment amount. If your loan is interest only, then your monthly interest monthly repayment will change.
What is an offset facility?
An offset account is an everyday transaction account that has an extra feature of offset. This extra offset feature allows the money in this transaction account to reduce the balance of your home loan, therefore reducing the amount of interest you are charged. Remember, interest on your loan is actually calculated daily and charged to your loan monthly.
For example, if your home loan is $400,000 and you have $20,000 in your offset transaction account, the bank will calculate that you only owe $380,000 and calculate interest on this balance owing.
However, visually you won’t see the distinction, instead, the bank’s systems will do this calculation in the background.
If your interest rate was 6% for argument sakes, then the $20,000 in your offset account is saving you $3.29 each day in interest. If you assume that your offset account balance doesn’t change, then each month you’re saving $98.70 (assuming a 30 day month).
The formula to work this out is $20,000 (amount in your offset account) x 6% (interest rate of your loan) / 365 (365 days in a year as interest rate is based on per annum) = $3.29/day x 30 days = $98.70/month.
It is certainly not a small amount of saving and over the long term, can save you a lot of money and help you pay off your home loan much sooner.
What is the difference between two?
Available funds in our redraw can be removed by the bank and it is up to their control. Although this is very unlikely to happen, it has happened before and has caused issues for many customers. In 2020, ME Bank’s systems suddenly removed the amount of available funds for redraw by thousands of dollars, this affected an estimated 20,000 home loan customers at the bank. This was done without notice to their customers.
The money in your offset account is considered your own savings hence the bank does not have the authority to simply take it away, this is a very important distinction between redraw and offset facility
Withdrawing money from your home loan redraw can ‘contaminate’ the original purpose of the loan and have tax deductibility consequences. This is especially relevant for those who have an investment home loan.