Offset vs Redraw: what's the difference and which is right for you?

Interest rates have risen sharply in the last couple of years, which means more borrowers are looking for clever ways to pay less interest on their home loan. Offset and redraw facilities are two popular ways to reduce your interest. But how are they different, and which is right for you? Here’s everything you need to know.

What is an offset account?

An offset account is a transaction account that’s linked to your home loan. You can transfer money in and out of it whenever you like, and you can even have a debit or credit card linked to it. You can also have your salary paid into your offset account, just like any other everyday account. The difference is, the amount in your offset account directly ‘offsets’ against the amount of your mortgage, reducing the amount of interest you need to pay.

Find out more about Bendigo Bank’s 100% offset on both fixed and variable home loans with our Complete Home Loan.

How an offset account reduces interest

If you have an outstanding loan balance of $500,000, and you have $50,000 in your offset account, your interest will be calculated based on a loan balance of $450,000, rather than the total $500,000. Put simply, any money sitting in your offset account is deducted from the  balance owing on your home loan before your interest is calculated. It’s as though you’ve paid it off of your loan, but you can still access it.

What is redraw?

Redraw is similar to an offset account in that it reduces the total loan amount on which your interest is calculated, but it does so in a slightly different way. Redraw essentially allows you to make additional repayments to your home loan, but the funds remain available for you to access if and when you want to. It’s not a separate account. It’s a feature within your home loan that simply allows you to ‘redraw’ any additional payments you’ve made, other than the amount of one repayment.

This ensures there are still enough funds available to meet your next scheduled loan repayment.

How redraw reduces interest

In the same way as with an offset account, if you have a $500,000 loan and $50,000 sitting in redraw, your home loan interest will be calculated on a balance of $450,000.

Offset vs redraw: key features and differences

Which is right for you?

Both offset accounts and redraw facilities can help you reduce the amount of interest you pay on your home loan. Deciding which is right for you depends on a few things, including:

• The type of home loan you have
• What your goals are
• How often you may want to access the funds
• Your remaining loan term

If you want to dip in and out of your funds regularly, have your salary paid into the account, and use a linked debit or credit card, an offset account may be best suited to your needs. However, if you’re saving for a larger project like a renovation, and you don’t intend to touch the funds in the short term, redraw might be a better option.

Get a health check on your offset and redraw options

Unsure whether to go with an offset account or a redraw facility? Not sure whether your home loan even has these features? A Bendigo Bank Home Loan Health Check can help. It’s free to anyone, even if you don’t bank with us. We’ll take a look at your loan, your circumstances, and your personal goals, and explore how well it’s serving your current needs.