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

What does offset and redraw mean?

At Coast we never want you to feel bamboozled by jargon. We’re here to explain what all the words that the banks throw around actually mean. Let’s start with unpacking what redraw and offset means. They’re definitely two which come up a lot when talking about home loans, and you’ll be asked pretty early on, if you haven’t been asked already, if you want a redraw facility, offset account or both!

Both are great for helping you save money on your home loan.

What’s an offset account?

An offset account is a separate deposit account that sits next to the home loan account. You can even have your employer deposit your salary into it, and you can use your offset account for everyday spending such as groceries using a debit card.

An offset account helps to reduce the interest charged on your standard variable home or investment loan. The money you keep in an offset account helps reduce the overall interest you pay on your loan. As interest is calculated on your home loan balance minus the amount in your offset account. For example, if you have a loan balance of $500,000 but you have $50,000 in your offset account, you’ll pay interest on only $450,000 of the loan balance.

What’s a redraw facility?

A redraw facility is a feature of some home loan products, not a separate account. It allows you to withdraw additional payments you have made on the loan. You can only redraw extra repayments, that is amounts you paid off above and beyond  the required minimal repayments. Making extra repayments (but knowing you have the ability to redraw on them if required), can help you pay off your loan earlier.

Both an offset account and a redraw facility are great for helping borrowers pay their loans off earlier, but there are marked differences between them, as well as some charges to be aware, and different tax implications for offset and redraw if you are renting out your home. So it’s definitely best to speak to us as your lending specialist and/or your accountant so we can make sure that your loan is structured in a way that’s tailored for your individual circumstances.

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