Pay off my mortgage sooner with an offset account or redraw facility

What is an offset account?

An offset account is a transaction account linked to your mortgage, where the amount in the account is ‘offset’ against your total mortgage amount to calculate your interest.

The only difference to other transaction accounts, is your lender may charge you a fee or your loan may have a slightly higher interest rate for having this facility available.

What is a redraw facility?

If you have made repayments above the minimum required by your lender, a redraw facility will give you the ability to withdraw those extra repayment amounts from your loan account.

While the definitions of redraw and offset sound different they are similar. Both use your extra cash to reduce the interest you pay on your mortgage while allowing you to access your cash later. The reduction in interest generally works the same in both cases, it is the access to funds where they mainly differ.

You also need to be aware that each lender has their own terms and conditions on how these facilities work. For example, if you have a fixed rate loan, then redraw and offset accounts may not be available, or if they are available there may be restrictions on the amount that can be applied to reduce the interest on your loan.

How does an offset account or redraw facility reduce the interest you pay on your mortgage?

Mortgage interest is calculated daily on your outstanding balance and charged monthly by most lenders. If your outstanding balance is reduced for only one day your interest will also be reduced. The extra repayments in your redraw facility or funds held in your offset account effectively reduce your outstanding balance for interest calculation purposes. This means if your salary is only available for one day before it is used, it could reduce the interest you pay on your mortgage if you put it into to your loan account or an offset account.

What are the differences between an offset account and a redraw facility or a savings account?

A savings account pays you interest on the amount you have deposited. A redraw facility or offset account does not pay you interest, instead they reduce interest on your home loan.

• The interest rate on your mortgage is generally higher than most savings and term deposit rates. This means the reduction in interest on your home loan may be greater than the interest you would be paid on a savings account.
• There may be minimum deposit requirements for some savings accounts, or tiered interest rates on savings accounts, with low balances receiving little or no interest.
• Interest from savings accounts is usually considered taxable income whereas interest saved on your home loan are not usually considered income. Talk to the Australian Tax Office or your account for details about your personal tax situation.

How do you access funds?

Offset account: You access your funds in an offset account the same way you would a transaction account, which could include a debit card, ATM, branches, online and phone banking.

Redraw facility: The funds you have access to on a redraw facility are usually the difference between the current outstanding balance and your current limit. They are usually accessed through transferring funds to a transaction or other account via online banking, at a branch or over the phone. Some people prefer this extra restriction on access to their money.

You should look at the terms and conditions of your loan or ask your bank about any restrictions or fees that may be charged on your redraw facility.

If there are restrictions, they could be things like: minimum withdrawal amounts; the maximum number of withdrawals per year or month; or times when no withdrawals can be made.

If your mortgage is for an investment property, there may be tax implications. If the redraw is used for non-income producing purchases such as a holiday, the interest on the redraw may not be tax deductible. You should check with the Australian Taxation Office or your account for how this would affect your personal situation.

Should I use an offset or redraw?

Which type of facility you use will depend on your personal circumstances and any additional interest or fees you may need to pay for using the facility.

Some people prefer the restrictions on their access to funds in a redraw facility. They find that if they are saving for a specific goal such as renovations, a new car or a big holiday, the restrictions help them to stick to their goal.

Other people like to use their transaction account as their offset account, as they want easy daily access to the funds. Often it will be the account they deposit their income into and pay all their bills from. This way they get the benefit of their income until they pay their bills.

If you can afford to save or make extra repayments to your home loan, then a redraw facility or offset account could help you to pay less interest on your mortgage and pay off your home loan sooner. Ask your lender if these features are available on your current loan, if there are any additional fees or interest for using them and what are the terms and conditions.