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Offset compared to redraw

January 27, 2024

According to a December 2023 broker pulse survey, ANZ maintained its position as the most frequently chosen lender by brokers, with 43 percent of brokers submitting loan applications to the major bank during the month.

The survey, conducted from January 8th to 19th, 2024, inquired about broker experiences in submitting loan applications to various lenders throughout December 2023. Notably, the survey results indicate that ANZ consistently stood out as the most utilised lender by brokers throughout the entire calendar year.

On average, throughout 2023, 43 percent of brokers opted for ANZ for their clients each month, marking the highest proportion among all lenders. This result would not be as significant if not for the fact that ANZ was wallowing a distant last amongst the majors only a couple of years ago.

In this week’s newsletter, we take a look at the difference between a loan with an offset account compared to a loan with a redraw facility.

What is an offset account?

An offset account is a transaction account connected to your home loan. You can deposit or withdraw funds from it, just like a standard transaction account.

The significant distinction lies in the fact that maintaining a balance in an offset account over time allows you to decrease the interest applied to your home loan. The greater the balance and the more extended the duration, the lower the interest you’ll incur. This has the potential to expedite the repayment of your loan.

Typically, the offset feature is exclusive to variable rate home loans, although some lenders provide this feature on specific fixed-rate home loans.

How does an offset account work?

Let’s consider a home loan balance of $400,000 and savings amounting to $20,000. By placing the $20,000 in an offset account, the interest on your home loan will be calculated on only $380,000, not the full $400,000. The $20,000 in the offset account doesn’t accrue interest; instead, it serves to offset and diminish the interest that would otherwise be levied on your home loan.

Despite the absence of interest earnings in an offset account, your money is still actively contributing. The primary purpose of an offset account is to decrease the borrowed amount subject to interest, thereby shortening the duration of your loan.

Similar to a regular transaction or savings account, the funds in your offset account remain accessible. However, if you make a withdrawal, you’ll have a reduced amount actively working to minimise the interest applied to your home loan.

What’s the difference between an offset account and a redraw facility?

While both an offset account and a redraw facility can yield similar outcomes, they differ significantly. An offset account functions akin to a savings account connected to your loan. In contrast, a redraw facility permits you to retrieve (or utilise) extra loan repayments beyond the mandated minimum payments.

Both options result in interest savings on your loan. Some loans provide both a redraw facility and an offset account, though accessing funds from an offset account is typically faster and more straightforward.

Variable

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.

1 Year Fixed

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.

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