Rates couldn’t stay that low forever. And while rising interest rates can cause challenges such as rising repayments, a little homework goes a long way to reduce their impact.

Looking for home loan tips? Well, you could open an offset account or choose a redraw facility.

What is an offset account?

A home loan offset account allows you to reduce the amount of interest you pay on your loan by putting money into a linked savings or transaction account.

Whatever credit balance you hold in this account will offset against the balance on your home loan. This reduces the interest costs on your home loan, meaning you will pay more of your principal component of the loan and could pay off your home loan sooner. . You don't earn interest on the balance in your offset account, even if the offset balance is higher than the amount owing on your linked loan.

Because it’s in a separate account, you are free to use this money whenever and however you like, just like a normal online account. However, any money you take out of this account will reduce the amount offset against the balance on your home loan.

How does an offset account work?

To demonstrate, meet Jack:

Jack has $400,000 still to pay on his loan, and $40,000 in his offset account. Because he has an offset, Jack doesn’t pay interest on the full $400,000. Rather, he only pays interest on the difference, that is $360,000.

If the money in Jack’s offset grew to $50,000, he’d only pay interest on $350,000. So you can see when interest rates rise, a linked offset account is an easy way to keep your payments down.

What is a redraw facility?

With a redraw feature, you can make additional repayments into your variable rate home loan (above the minimum repayment amount), which reduces the balance owing on your home loan. And that means you’ll be paying less interest on your home loan and could pay down your home loan sooner. Not all loans allow a redraw facility, so it's worth asking if yours does or not.

How does a redraw facility work?

On variable rate loans, you can withdraw the additional repayments made at any time ($100 minimum) if you need access to those funds. So, if circumstances change and you need to access the money you’ve used on extra repayments, you can. That means if you need to pay for, say, an emergency medical bill or unforeseen travel expenses, you can redraw these funds from your home loan to cover it.

Just remember, this will increase the balance owing on your home loan by the amount withdrawn and your interest costs will also adjust accordingly. Of course, if you don’t redraw, the extra repayments mean you’re reducing the interest you pay on your home loan. Sounds like a win-win, right? Just be sure to check any fees or restrictions that come with a redraw, and remember that your interest and home loan balance increase any time you take money out.

So, what’s the difference ?

When it comes to offset accounts and redraw facilities, there are some similarities and some differences. Both features can help to reduce your interest costs and pay down your home loan sooner. But they do that in different ways.

The offset feature is on a separate account where you may have money regularly coming in and out of. While the redraw feature is a feature on variable rate loans, where you can withdraw additional repayments made (above the minimum repayment amount) when you need to.

There could also be different tax implications when using either feature (particularly for investment properties) if you are seeking to make the interest charged on your loan tax deductible.

Which is better?

Whilst a redraw facility does give you access to additional repayments you’ve made, remember it is a feature rather than an account.

An offset account on the other hand works like an everyday transaction account. As you can use a bank card to make payments and move money around, there is an added element of flexibility with an offset account. At the end of the day, the decision will come down to your own individual financial goals and circumstances.

Can I use them together?

Yes, both features can be used at the same time. In theory, each month you could make an extra repayment into your home loan using your redraw facility and use your offset account to deposit your salary. 

Just remember, when considering redraw vs offset, not everyone’s situation is the same and what’s suitable for one person may not be suitable for another. So, it’s important to consider your own individual situation and speak to a trusted financial advisor. 

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