Redraw Facility vs Offset Account - Is there a difference?

Having a redraw option is essentially a feature of a home loan, while an Offset account is a separate transaction bank account which is held against the home loan mortgage and operates like an everyday bank account. The cash balance in the offset account is deducted from the loan balance when interest is calculated, but is a separate bank account with you personal cash funds held in it.

Redraw facilities allow you to redraw funds you have paid in advance of your loan repayments. So if you have made extra loan repayments or paid lump sum amounts down on your loan, a redraw feature enables you to draw out extra cash from the loan when needed eg for home renovations.

The common feature of the two options is that they both work to reduce the interest on the mortgage. But they work differently to achieve this.

Redraw options – may have minimum and maximum amounts you can redraw. There may also be daily withdrawal limits and also fees may be charged for each redraw. You need to read the terms and conditions (Product Disclosure Statement) as redraw facilities can vary from bank to bank. Also if you use the redraw funds for personal non deductible use, then if you ever wanted to make the property an investment property down the track, the amount of the loan redrawn for private or personal use is not deductible as it the use of the funds that determines whether interest is deductible.

Offset accounts - use your cash funds to reduce the total balance the mortgage interest is calculated on. There may also be fees and charges on the account for transaction purposes but if you ever decided to make the property on which the home loan is on, an investment property, then you can move the cash in your offset account to another account and this means the full amount of the loan on the property would then be tax deductible. So you are maximising deductible debt enabling you to minimise non-deductible debt, if you use the cash in the offset account to fund the deposit on your next home or use the cash to fund a non-deductible expense or asset.

Eg If you have a Home Loan of $500,000 with an Offset account balance of $40,000 – interest on the loan is calculated on $460k ie $500k - $40k, instead of $500k – reducing the interest component of your overall loan repayments.

Redraw and offset accounts are useful tools to reduce the overall interest on a loan, and are likely to be a more tax effective option than parking cash in a separate savings account, as any interest received on the savings account will be assessable income taxed at your marginal tax rate, while the paying down of a loan or parking cash in your offset account, will save interest on your home loan, which is not assessable for tax purposes.