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An offset account is a transaction account which is linked to your home loan and which has normal transaction account functionality.
The benefit is that the money in your account is offset daily against your loan balance, and this will reduce the mortgage interest charged accordingly.
While most offset accounts will offset your loan balance in full, some only offer a partial offset.
A redraw account is a feature which enables borrowers to withdraw money they have already contributed to pay off their loan.
The balance of this facility consists of whatever extra payments the borrower has made towards paying off their loan.
In many ways, redraw and offset facilities are quite similar, however there are some differences to note:
|Offset account||Redraw account|
|Flexibility and accessibility||No restrictions and is easily accessible. You can deposit and withdraw money as often as you like.||There are certain restrictions on withdrawals, such as a set number of withdrawals per year and withdrawals needing to be approved beforehand, making the money less accessible.|
|Withdrawal fees||No fees associated with withdrawals.||There may be redraw fees associated with redrawing money from your loan.|
|Investment loans||Money withdrawn from an investment loan offset account for non-investment purposes shouldn’t affect your tax deductibility on the overall interest expense.||If you redraw money from an investment loan for non-investment purposes the interest on that amount will no longer be tax deductible.|
|Tax benefits||The money in your offset account isn’t considered taxable income since the account doesn’t generate any interest.||Additional funds being placed into your owner-occupied home loan do not incur income tax.|
|Costs||Not all loan products have the option of a linked offset account. Offset accounts can incur additional bank fees and charges and the interest rate can be higher on these loan products.||Not all loan products have the option of a redraw facility.|
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