Offset vs. redraw
An offset account is a separate transaction account, usually allows you to access your funds instantly, and is protected under the Financial Claims Scheme. Read more to find out the other differences.
May 26, 2020 • 2 min read
Offset accounts differ from redraw facilities in a number of important ways. While they are similar in function – both are a means to store funds and reduce the amount of interest you pay – they have nuances of their own, too.
So. How are they different and which one best suits your requirements?
An offset accounts is a separate transaction account. The money in your offset account is calculated daily, but you'll only see the offset amount applied at the end of the month when your interest amount appears on your statement.
A redraw facility allows you to access any additional payments you have made to your home loan - you can't withdraw the money you've repaid on your loan. The extra repayments can be regular payments over the minimum, or from a lump sum payment.
Money is easily accessible like it would be for any account, and typically comes with a card that you can use at ATMs , EFTPOS machines, and online shopping – it’s more convenient because you can access the money instantly vs. the delay you may experience with transferring from a redraw account.
Money is accessible via your home loan account and is typically transferred into another account (i.e. savings, everyday or offset account), so it can take a couple of days before it lands in your account.
Not always available with a fixed rate loan – but don’t worry, it is with Tiimely Home.
Additional repayments are not always allowed for fixed rate loans, or the amount is capped per annum, like Tiimely - we allow up to $20,000 in additional repayments on fixed rate loans
Protected under the Financial Claims Scheme (FCS) for up to $250,000 (note you're only protected for up to $250,000 per account holder per ADI licence holder - so anything above $250,000 per institution, is not covered under the guarantee - and wow, good on you for having some hefty savings).
The additional repayments have technically been paid to the lender so, they belong to the lender. A redraw facility is them allowing you to access the excess funds. Technically lenders can change their mind about offering this facility and sometimes without notice.
Minor catch: Unlike some other lenders, at Tiimely Home we don't build the cost of the offset account into our interest rate. You simply pay $10 per month for the feature instead.
Online redraws are typically free (manual redraws – i.e. calling up and request a withdraw process, can incur a cost).
Both can be helpful by
Reducing the amount of interest you pay on your loan (just so we’re clear).
Decreasing the amount of tax you pay, i.e. if you were earning interest in a savings account, that would be considered income and is taxable.
For investors: there may be tax implications if you decide to bring your loan balance down through extra repayments and accumulate the amount in a redraw facility. You would need to demonstrate that the use of these funds are for investment purposes to be able to claim them as tax deductions vs. funds sitting in an offset account where the ‘fund purpose’ test would not apply (because the full loan amount would be tax deductible). Head over to the ATO or speak to a registered tax adviser to find out if this applies to you.
Allowing you to build good savings habits by encouraging you to pay a little extra or putting away money (and save more while you’re at it, win-win)