As any home buyer knows, buying a home is just the beginning – the real challenge is paying down the home loan. Deciding how much to pay down can be a bit tricky especially when it comes to budgeting and ensuring there is enough money in case of an emergency or to manage unplanned and even planned future expenses. This is where a redraw or offset option comes in handy as it allows borrowers to access any extra payments paid into the home loan when the need arises. The natural question is, what is the difference between the two and which one is better?
Redraw facility
Most lenders have the option for customers to enable redraw on their home loan. To understand how this works in detail, you need to understand the difference between a loan balance and loan limit.
When you take out a home loan, the bank calculates your loan repayments based on the minimum payment you would need to make each period (weekly/fortnightly/monthly) to have the loan paid off over 30 years. If you were to put this in a table, you will find that with each payment your loan will reduce slightly and continue to reduce for 30 years until it reaches a $0 value. In bank speak, this is also known as your amortisation schedule and the loan reduction each payment cycle is the reduction in your overall loan limit. If you made the minimum repayment each time, then your loan will be paid off in 30 years in accordance with your amortisation schedule.
However if you decided to make extra payments above and beyond your minimum repayment, your loan balance would be lower than your loan limit (because limit works off the amortisation schedule). As such, the difference between the limit and your balance is your available redraw. Confused? – let’s take a look at a simple table:
| Month | Limit | Balance | Minimum payment | Actual payment | Available redraw |
| January | 100,000 | 100,000 | 2,000 | 5,000 | 0 |
| February | 98,000 | 95,000 | 2,000 | 10,000 | 3,000 |
| March | 96,000 | 85,000 | 2,000 | 2,000 | 11,000 |
| April | 94,000 | 83,000 | 2,000 | 2,000 | 11,000 |
If you look at the limit (amortisation schedule), it will reduce by the minimum payment amount each month so from January to February it goes from 100,000 to 98,000 as it expects a $2,000 payment. If the actual payment is higher, then the extra payment amount becomes available redraw (the amount of money you may be able to redraw). In this instance, the actual payment from Jan to Feb is $5,000 so $3,000 more than the minimum payment and as a result this is the available redraw. Note I’ve purposefully ignored interest in the example to simplify the content.
In essence, available redraw is the amount of money you’ve paid over and above your minimum payments. The bank enables you to redraw or take this money back out at any time if you have redraw enabled. Since you only pay interest on your loan balance and not the full limit, you’re still saving interest by leaving the money as available redraw.
Offset account
An offset account is similar to a redraw in nature but the extra money sits in a separate account and comes with a couple of additional benefits. An offset account is a transaction account that is linked to your home loan account. What this means is that any money sitting in the offset account is offset against the home loan so you pay interest on the net balance. From an interest saving perspective, this is no different to a redraw facility except that since your additional money sits in a transaction account, you will likely have debit card access to your money.
To bring this to life, let’s suppose you have a home loan of $100,000 and have $20,000 sitting in your offset account. This means that you will only pay interest on $80,000 as the bank will offset the $20,000 in your linked account.
Note that whilst most offset accounts are 100% offset which means that any money in the linked transaction account is offset, some banks offer partial offset accounts where only a subset of the amount is offset which is not great.
What is better?
From an interest payment perspective, there is no difference between keeping your money as available redraw or in an offset account. However you should generally always utilise the offset option (100% offset) if available. There are a few reasons for this including easier access to your funds, generally no associated fees and so on. However one of the key benefits which a lot of people don’t understand are the tax implications.
In Australian tax law, once you pay down a home loan and then redraw those funds, you can no longer claim the redrawn amount as a tax deductible debt. This means any time you make an extra repayment and subsequently redraw, your tax position is worse. If you keep your money in the offset however, you’re never technically paying the debt as it’s a seperate account and can continue to claim the full loan value in the instance you use the funds sitting in the offset account.
Some people may say that this is only relevant for investors and as a person who lives in their house as an owner occupier, this isn’t something to be concerned about. The thing to consider in this instance is what you may decide to do in the future.
As an example, let’s suppose you live in the house and put extra money towards your home loan for 5 years and manage to pay off half your loan. At this stage, you have a change in circumstances and decide to get a different property to live in and rent out the house you were living in before. The problem you’ll run into is that half your debt is already paid off and the tax office will only let you claim that as a deductible debt even if you used the remaining money from your redraw to fund the new purchase. If you had used the offset however, you’d be able to claim your entire loan because you’d be using money from your offset to fund the purchase. The offset basically leaves your options open.
In a nutshell, your interest position on both a redraw and offset is generally the same however you should always choose the offset if available due to the ease in accessing funds, the tax benefits as an investor and to leave your options open for the future as an owner occupier.