• Mark Sinclair

Offset vs Redraw

Do you really need an offset account with your home loan? Tier 1 lenders would like you to think you do.

As a mortgage broker, I often have this conversation:

Me: If we go with this loan product, then I can save you XX% p.a. on the interest rate. That will result in some pretty big annual savings for you, allowing you to pay your loan down sooner.

Client: Does it come with an offset account?

Me: It comes with a free redraw with instant access to your surplus funds. Do you really need an offset account?

Client: Yes, I do.

Me: Why?

At this point I usually get silence. Not because I have challenged the client but because they have been programmed to want an offset account and don't understand that they can achieve the same goals with a free redraw facility - and at a lower interest rate.

A brief history of offset accounts

Some decades back, some very clever marketing people in the big lenders introduced this thing called a home loan offset account. It was a way people could drop extra funds into an account that sits alongside their home loan and any funds in the account would offset their home loan account, reducing the interest that they would pay. For example, if someone has a home loan of $500,000 and they had $100,000 parked in a linked offset account then they would only be charged interest on $400,000. You could also use this offset account like any other transaction account so it made sense to have your salary paid into it.

For the big lender, this had several benefits:

  1. It made them more sticky since customers would keep their transaction accounts as the offset account

  2. They could charge a higher interest rate and monthly fee for loan products with offset accounts (and they did)

  3. They would fend off non-bank lenders that were unable to offer offset products since they weren't a traditional bank and could not offer deposit accounts

Over the past 20 years, offset accounts have become the must-have home loan accessory and most people are programmed to ask for one.

Basic home loans fight back

However, the basic home loan (one at a lower rate, no monthly fee and without an offset) has more recently evolved to compete with home loan offset accounts. The vast majority of basic variable rate home loans now come with the ability to make unlimited extra repayments, which are then available for redraw. This is commonly called a redraw facility. A similar concept applies to savings on interest - any extra repayments made to the home loan will reduce the interest paid. Using the same example, if someone has a home loan of $500,000 and they had $100,000 deposited in as extra repayments then they would only be charged interest on $400,000.

Years ago, most home loan accounts had redraw fees and minimum amounts that could be redrawn - mainly to make the offset account options look more attractive. However, these days, the majority of basic loans have free redraw, no redraw minimums and lenders will also give you instant access these funds via online banking/banking apps.

Save on interest and monthly fees

With modern redraw facilities featuring free unlimited redraw, you can achieve the very same interest-saving outcome as what you can with an offset account but with the benefit of a much lower interest rate.

If your property is an investment property, then having an offset account may make sense where you have extra funds that can't be used elsewhere but you don't want to reduce the loan balance by paying them in to the loan. Be sure to talk to your accountant about this to see if it is of any benefit to your situation.

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