Offset account vs redraw: Which is better when refinancing your home loan?

Both an offset account and a redraw facility can reduce the interest you pay on your home loan, but the right choice depends on why you're refinancing and how you manage your money.

An offset account can cost more through package fees or a higher interest rate, so it's only worthwhile if you keep enough savings to offset those costs. A redraw facility is often a lower-cost alternative, but it doesn't offer the same flexibility.

Some borrowers benefit from an offset account, others from redraw, and some don't need either. What's important is choosing the loan structure that matches your financial situation.

An offset account is a bank account linked to your home loan that reduces the amount of your loan on which interest is calculated. Instead of using your savings to pay down your mortgage, you keep them in the offset account, where they continue to reduce your interest while remaining available whenever you need them.

For example, if you have a $600,000 home loan and $100,000 in your offset account, your lender calculates interest as though your loan balance were $500,000. You still owe $600,000, but you only pay interest on the difference.

Because interest on most Australian home loans is calculated daily, every dollar that sits in your offset account reduces your interest for as long as it remains there. This means depositing your salary into your offset account and leaving it there until bills fall due can reduce your interest, even if the balance changes throughout the month.

A redraw facility allows you to access any additional repayments you've made on your home loan above your minimum required repayments. Instead of keeping extra money in a separate account, you pay it directly into your loan, reducing your outstanding balance and the interest charged.

For example, if you have a $600,000 home loan and make an additional $50,000 in repayments, your loan balance falls to $550,000. Interest is then calculated on the lower balance, helping you pay off your loan faster.

Unlike an offset account, the money isn't held in a separate bank account. It has already been paid into your mortgage. If you need those funds later, you can usually access them through your lender's redraw facility, subject to the terms and conditions of your loan. Some lenders impose minimum redraw amounts, transaction fees or processing times, while others allow redraw online almost instantly.

Redraw facilities are commonly available on variable-rate home loans, although not every lender offers them and the rules vary between products. If having access to your extra repayments is important, it's worth checking the redraw conditions before refinancing rather than assuming every loan works the same way.

In many cases, yes. If an offset account and a redraw facility are attached to loans with the same interest rate, and the amount involved is the same, they will generally reduce the interest charged by a similar amount.

The difference usually isn't how interest is calculated. It's the loan structure. Offset accounts are often offered with package home loans that may charge annual fees or have different interest rates, while redraw facilities are commonly available on lower-cost variable loans. Access to your money and the flexibility to use it also differ.

For most borrowers refinancing their home loan, the decision isn't simply about which feature reduces interest. It's whether the additional flexibility of an offset account is worth any additional cost compared with a simpler loan that includes redraw.

When refinancing, offset account balances do not transfer automatically. You may need to open a new offset account with your new lender. It's important to coordinate with your broker or lender to ensure continuity.

An offset account isn't free. Many offset home loans charge an annual package fee and, in some cases, have a slightly higher interest rate than an equivalent basic variable loan.

That means the interest you save using the offset account first has to cover those additional costs.

For example, suppose you're comparing two refinance options from the same lender:

• Basic variable loan: 5.89%
• Offset loan: 6.04% (+0.15%)
• Annual package fee: $395
• Loan amount: $600,000

The higher interest rate would cost around $900 a year, while the package fee adds another $395. Together, that's approximately $1,295 a year in additional costs.

To recover those costs, you'd need to save at least $1,295 in interest through your offset account.

At an interest rate of 6.04%, that means keeping around $21,500 in your offset account throughout the year just to break even.

Saving less than that doesn't necessarily mean an offset account is the wrong choice. Many borrowers value the flexibility of having immediate access to their money. But if you rarely keep cash in savings, paying for an offset account may cost more than it saves.

As Moneysmart explains, even small differences in interest rates and fees can add up over time. That's why comparing an offset account isn't just about the feature itself, it's about weighing its cost against the interest you expect to save.

The right choice depends less on the loan feature and more on how you manage your money. Before choosing an offset account or redraw facility, think about how much you typically keep in savings, how often you need access to that money, and whether your circumstances are likely to change over time.

• You consistently keep enough in savings for the interest savings to outweigh the additional cost of the offset account.
• You receive bonuses, commissions or irregular income and want that money reducing your interest until you need it.
• You want immediate access to your savings without making a redraw request.
• You plan to convert your home into an investment property over time. Keeping your savings in an offset account, rather than paying them into the loan, can help

• Your savings balance is generally low.
• Your priority is paying down your home loan as quickly as possible.
• You don't need regular access to extra repayments.
• You're looking for the lowest-cost loan and don't want to pay for features you won't use.

Not every borrower benefits from an offset account or a redraw facility.

Many people refinance for one reason: to reduce their interest rate. If you don't keep significant savings alongside your loan or make regular extra repayments, additional features may provide little value while increasing the overall cost of the loan.

In such a situation, a vanilla home loan may suit your requirements, without any additional charges. Remember that the right refinance isn't necessarily the one with the most features, it's the one that best matches how the loan will actually be used.

If you're not sure which loan structure is right for you, speak to an expert and compare your options before refinancing.