You may have heard of a redraw facility and offset sub-account before, but do you actually know what they are, or how they can be beneficial for your home loan?
A redraw facility provides the opportunity to make extra repayments on your home loan in addition to your minimum weekly, fortnightly or monthly repayment. These additional funds can be taken out or redrawn if needed to cover an unexpected expense or upgrades such as renovations.
Redraw facilities can help you pay off your loan faster, assuming you do not make any withdrawals. For certain borrowers, using a redraw facility can be a more cost-effective option than a regular savings account, as the interest saved from using the redraw can be greater than the interest earned in an everyday account.
An offset sub-account is a separate transaction account linked to your home loan and can be used like an everyday savings account to deposit money, save and make withdrawals. The benefit of using an offset sub-account linked to your home loan is that the money within the account is used to ‘offset’ the total interest-accruing balance.
With both serving to help to reduce the amount of interest payable on your home loan and pay off your mortgage sooner, redraw facilities and offset sub-accounts have a few key similarities, including:
Helping to reduce the overall amount of interest payable on your home loan.
Allowing borrowers to pay off their mortgage faster.
Available on most variable rate home loans.
The primary difference between redraw facilities and offset sub-accounts is that funds kept in an offset sub-account are separate from your home loan, whereas a redraw facility is simply a feature attached to your home loan. Below you’ll find a comparison of the differences between redraw facilities and offset sub-
|Balance in redraw comes from the extra repayments you have made.||Offset sub-account works just like your everyday bank account. You can nominate the account to receive your salary, or any other regular payments.|
|Funds in your redraw facility created by extra repayments reduce the interest amount on your home loan.||Money in your account offsets against the balance of your home loan, reducing the interest charged.|
|Easy access to your funds via transfer to your transaction account.||Instant access to your day-to-day funds. Pay bills and credit card debt, withdraw cash at an ATM, use a debit card.|
|You can increase the balance in your redraw facility by making extra repayments manually using direct debit.||You can pay your salary into an offset sub-account to get the benefit of your income reducing interest.|
Let’s say your minimum monthly repayment on your home loan is $1,000. You decide to pay an extra $100 a month – adding up to $1,200 extra in one year. Your home loan debt will be $1,200 lower which will result in less interest being charged, but these extra funds are still available for you to access through a redraw facility if and when you need them.
Let’s say your loan balance is $400,000 and you put aside an $40,000 annually in your offset sub-account from both your savings and salary.
Instead of calculating interest on a home loan balance of $400,000, interest is calculated on a balance of $360,000 ($400,000 - $40,000), meaning in essence you pay less interest.
In summary, putting money into your offset sub-account is like making extra mortgage repayments - except you can conveniently redraw the money using a VISA debit card as if it were a regular transaction account.
To help calculate how many years you could take off your home loan, and how much you could save in interest, be sure to check out our offset calculator.Offset Calculator
If you have a fixed rate home loan, your options are generally limited when it comes to adding a redraw facility or an offset sub-account. Fixed rate home loans are in most cases ineligible for linking to a redraw or offset sub-account - however this depends on the lender and their loan product capabilities. Very few lenders will offer a fixed loan with a redraw or offset facility. At the end of your fixed rate period, your loan will shift onto a variable interest rate. When this happens, you can consider adding a redraw facility or getting an offset sub-account.
If you are looking to refinance your home loan from one variable product to another, be sure to check to see if the lender offers redraw facilities or offset sub-accounts for the loan that best suits your financial situation.
If you want to take advantage of redraw facilities or offset sub-accounts while on a fixed rate home loan, you will need to consider breaking the fixed term of your loan. Given you entered a fixed-term loan, you signed a contract agreeing on the period of time the loan would be fixed. breaking the fixed term of your loan means you’re breaking this contract and as a result, the lender will require compensation for any loss - usually in the form of a fixed rate break fee or a switching fee, depending on your lender.
You might be eligible for a split home loan, where a portion of your loan is fixed, and a portion of your loan is variable, giving you access to a redraw facility and offset sub-account.
The decision of which is the best option, redraw or offset sub-account, will depend on what suits you and your financial situation best. Both help you to save on interest repayments, just in slightly different ways.
If you have a little extra disposable income to put towards your home loan but still want plenty of flexibility when it comes to accessing your funds without restriction, an offset sub-account can be a good option for everyday expenses.
On the other hand, if you are confident you can manage making additional repayments without the need to access the funds regularly, then a redraw might be the best solution for you.
You may want to consider independent financial advice such as consulting an accountant or home loan expert to determine which option is right for you.
At loans.com.au our offset sub-account is 100% offset, meaning we take into account all of your money in your offset sub-account when we calculate your benefit.
Our Smart Home Loan product gives you the option of an offset sub-account with a VISA debit card included. Chat to one of our lending specialists to find out more or pre-qualify to get started.
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.