Offset vs Redraw – which is better

Congratulations! You’ve found the property you want, and now it’s time to arrange your home loan. Congratulations! You’ve found the property you want, and now it’s time to arrange your home loan. 

One choice you might have to make is whether to take a loan with an offset account or a redraw facility. Both have their benefits, so let’s break them down.

An offset account is a transactional account linked to your home loan that can be used to reduce the interest charged on that loan. For example, if you have a $600,000 loan and you have $30,000 in your offset account, you’re only paying interest on $570,000. This can save you some serious dollars over the life of your loan.

Remember that the offset is a transactional account, meaning you can access that money whenever you like. You can use it for everyday spending, but to get the most benefit out of the offset, you want to keep the balance as high as possible.

So, if you sometimes have a couple of quiet drinks and start buying cool but not completely necessary stuff on the internet or booking an overseas holiday on the spur of the moment, an offset account might be too much of a temptation. 

Let’s have a look at a redraw facility.

This allows you to make extra payments on your home loan, which helps reduce your principal and, hence, the interest charged. Now, you can usually access those extra funds if need be, but it might take a few more steps, like getting approval from the lender, so you’re less likely to dip into them on a spur-of-the-moment decision. You’ll save money long-term as you’re reducing the interest paid on your mortgage by reducing the total loan amount.

So now the big question is, which is better?

Well, it depends on the type of person you are and your financial goals. Suppose you’re a naturally disciplined person who likes having access to their money anytime but can be confident you’re unlikely to make impulse purchases. In that case, an offset account might be the right choice. If you like to stay disciplined by not having quick access to money but also the security of knowing you can get it in an emergency, then a redraw facility could be just what you’re after.

The most important thing is to be honest with yourself and talk it through with your broker.