Redraw vs Offset

Redraw vs Offset accounts

Hi everyone it’s Heath Bassett from You&Me Personalised Property Services, and Matthew Stevens from Capita Finance and here we are in another episode of “Getting Chatty with Matty”.

Matt, thanks for joining me.

So, offset versus redraw accounts, this can be a bit confusing. I know what an offset is. I know what a redraw account is too. But I don’t really know the advantages to either and how you can best utilise that in multiple offsets into one loan and the like.

Many property buyers ask us what the difference is between offset and redraw. Our buyer’s agent services help these property buyers make the right decision.

So, can you explain firstly what they are and how you can take advantage of them in against your loan?

What is an offset account and what is a redraw account?

A question I get a lot is: what’s an offset account? What’s a redraw facility? And what are the advantages and benefits of both, advantages, and disadvantages of having one or both?

Offset account

An offset account, starting high level, is effectively when you have a separate very similar to a transaction account that you have at the moment with your current bank.

However, the only difference is that it’s linked to your loan. So for every dollar that you have in your offset account, it reduces the balance of your loan. So when the bank calculates interest, which they do every day at the end of every day (read more about the October 2022 bank interest rates), they calculate interest based on your loan balance. The linked offset account reduces that balance and therefore the calculated interest on that particular date.

Is an offset account better?

So there’s an obvious advantage to having an offset account which I believe you can only use on a variable interest?

Not necessarily. So again, there are products that allow partial and full offset accounts on fixed-rate products. So, there are a few lenders with that, whether that’s a 40%, 50% offset account or a full offset account for a fixed product. But it’s very limited. It’s not typical. It’s best to just assume the variable will have a 100% and the fixed won’t.

Offset account with a $500,000 mortgage

So in layman’s terms, an offset account, you have a $500,000 mortgage, you’ve got $400,000 sitting in an offset account against that mortgage, which obviously you can use as a daily withdraw and you’re paying interest on $100,000 left over. Correct.

Redraw account

The redraw facility works in exactly the same way. So rather than having the linked offset account, the funds are just directly into your loan. So if you have that $400,000 and $500,000 loan and you want to put that $400,000 into your loan account to reduce the amount of interest that you’re being charged, then you can do so.

And then the redraw facility allows you to draw those funds back out.

It works exactly the same way.

The difference between offset and redraw account

The difference is just that one’s adding funds directly into your loan account: the redraw account. One’s sitting funds in a separate transaction account: the offset account.

What should you choose?

So again, a little bit of confusion. Why would you choose a redraw account over an offset account, offset or redraw? Or do the banks choose that for you?

Yes, so great question. And it comes down to the price of the product. The main difference is that an offset account typically pays for it. So, this is a difference between if you’ve ever heard of a packaged product or a standard variable loan.

Yes, you pay 3.95% a year or something for that account and a credit card.

That’s exactly right. Compared to what they call a basic product, which typically has no ongoing fees, that’s the main difference in terms of price. You need to really decide whether and also the account is actually costing you more money than the value of getting out of it.

And the main benefit of having those offset accounts is the allowance for multiple offset accounts.

So, if you only have a single savings account, then typically a redraw facility is more than sufficient. If you have multiple savings accounts, one for the kids’ tuition, one for a holiday fund, one for a car, you might want to have all three of those as offset accounts, all reducing the balance of your loan and therefore the interest you’re charged.

How many offset accounts can you have?

It depends on the lender

Great! So, how many offset accounts can you have?

Look, St George will let you have 99 offset accounts, so it depends on the lender, but typically up to ten is the standard.

Cool, so you can have ten offset accounts all saving for different subjects, but they all pay off the one loan. Or can they pay off multiple loans?

Multiple offset accounts for multiple loans

Yes. You can have offset accounts linked to multiple loans. The rule of thumb is to connect your link and offset account to the highest-interest loan. That’s effectively the easiest way.

Investment loan, right? For tax purposes in the like? For your principal?

Owner-occupied properties is where you want to be reducing the interest because it’s not taxed up.

What is the maximum for a redraw account?

Okay, no dramas. Now, I’m talking from personal experience. The bank said I can only put in up to $20,000 extra over the term of my fixed-term loan. Now I’ve got a redraw facility in the confusing parties. Can I put all my funds into that redraw facility?

Take them back out whenever I want? Or can I, as the bank said, only have $20,000 extra over the course of a three-year fixed-term loan? Can I only put $20,000 in that? Would they only take $20,000 off the loan?

That’s a lot of questions! Effectively, what you can do to sum up everything you said is you can only deposit the maximum amount of debt within the fixed loan that they’ll allow you to do.

So, depending on which lender that is, they might be $20,000, maybe $15,000 if it’s over the three years and put the entire amount in first, you should always check with your lender as what that maximum is because if you do go over you can incur break fees or penalties.

So little bit of confusion out the window now, but I’m sure that there’s plenty more to talk about. We won’t go into it today.

Contact us if you have any questions

But if you want to know any more information about the offset and redraw facilities, speak to Matt from Capita Finance and until next time, as always, happy investing.

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