Put simply, an offset sub-account is linked to your home loan where you can put money (e.g. from savings or your pay) and rather than earn credit interest on that money, use the money to reduce the interest payable on your home loan.
Your money is at call, so you're able to access it anytime you want, using your Visa Debit card attached to the account.
Alternatively, a redraw facility allows you to make extra payments towards your home loan, which can also be withdrawn as required. If you do not access the funds, a redraw facility can help you pay off your loan faster.
In summary, both offset sub-accounts and redraw facilities can help you save on your home loan in different ways. At loans.com.au we offer redraw facilities and offset sub-accounts for a wide range of our variable rate and other eligible home loans.
Let's look at both of these home loan features a little more closely.
An offset sub-account is a transaction account that is linked to your home loan and can be used like an everyday savings account to deposit money, save up, make withdrawals and pay for things.
The benefit of using an offset sub-account linked to your home loan is that the money within the account is "offset" against the balance of your loan. However, as the offset sub-account is linked to your home loan, it is not a separate deposit account.
As such, the offset sub-account cannot have a credit balance, that is, be greater than the amount in your home loan.
When we calculate your home loan interest we reduce the amount of your home loan balance by the amount you have in your offset sub-account. So you'll pay less interest which could help you pay your home loan off sooner.
To give you an example: Say for example your loan balance (amount you owe us) was $400,000 and you had $40,000 in your offset sub-account. Instead of calculating interest on a home loan balance of $400,000, we'd only calculate it on a balance of $360,000 ($400,000 - $40,000). So you'd pay less interest.
Also it's important to note that our offset sub-account is 100% offset. That means we take into account all of your money in your offset sub-account when we calculate your benefit. Not all lenders do this, and some might only offset a smaller percentage.
In summary, putting money into our 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.
A redraw facility allows borrowers to withdraw any additional repayments they have made towards their home loan.
By offering the ability to make additional payments, redraw facilities can help you pay off your loan faster, assuming you do not make any withdrawals. But in the case where you come into an unexpected cost or need a little extra cash on hand, they can be very useful.
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.
Offset sub-accounts and redraw facilities have a few key similarities:
Help reduce the overall amount of interest payable on your home loan
Allow borrowers to pay off their mortgage faster
Available on most variable rate home loans
An offset sub-account generally come with a Visa debit card for access via ATM and EFTPOS.
More flexibility to access savings with less restrictions or fees on withdrawals compared to redraw facilities
Can help homeowners save on interest on their mortgage repayments
The money saved in your offset sub-account is not considered taxable income as it does not earn any interest*
Can help borrowers reduce the overall length of their home loan
Not all home loans offer offset accounts
Depending on the lender and the specific loan, borrowers may need to save a significant amount of cash to cancel out any additional fees or bank charges associated
Ability to withdraw additional payments can be helpful in an emergency
Savings on mortgage interest repayments can outweigh the interest earned if you put your earnings into a regular savings account
Lower mortgage repayment costs
Depending on the bank or lender, there may be a fee charged for making a withdrawals or limits on how often you can take money out
No all home loans have a redraw facility available
The decision of which is better, 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.
How you use these features is up to you and how you prefer to manage your finances.
Our Smart Home Loan product gives you the option of an offset sub-account with a VISA debit card included. Speak to a lending specialist to find out more or pre-qualify to get started.
We also recommend that when you are considering anything financial, that you do the calculations and get independent financial advice which is specific to your circumstances.