Redraw vs Offset - Which one May be better for your circumstances?
Years ago, the Offset Account was a premium feature, marketed almost exclusively to high-income professionals. Dubbed affectionately in the industry as the "Pro Pack", (Professional Package), these loans were designed for doctors, lawyers, and other individuals deemed to be high-income-earning professionals. It was a status symbol of sorts: a bundled facility that gave you the mortgage, an offset account, and a platinum credit card, all wrapped up with an annual fee.
Today, the landscape has changed. Almost every lender offers an offset account, and they are no longer aimed towards the wealthy. But just because you can have one, does it mean you should?
With the rise of basic, no frills loans offering ultra-competitive rates, it is time to ask: is the additional cost of an offset account really worth it?
The Mechanics: Same Outcome, Different Function
Mathematically, Offset and Redraw do exactly the same thing. If you have a $500,000 mortgage and you have $50,000 sitting in either an offset account or in your redraw facility, the bank only charges you interest on $450,000. Both methods save you the exact same amount of interest.
The difference lies in functionality.
Offset: This is a separate transaction account linked to your loan. It has an BSB and Account Number. You can have your salary paid into it, use a debit card, and pay bills directly from it. It is your everyday money, working to reduce your interest.
Redraw: This is a feature inside the loan itself. It represents the extra repayments you have made over and above the minimum. To access it, you typically need to log in to internet banking and transfer the funds to a separate account. Note: While there are a handful of lenders who offer a transactional redraw facility, this is the exception, not the rule.
The Cost, and The Value
This is where the debate often settles. To get an offset account, you’ll sign up for a product which likely incurs an annual fee (often around $395) and the promise of a discount off the Standard Variable Rate (SVR). However, in the current market, Basic loans, which come with a redraw facility but no offset, often have interest rates that are lower than the discounted package rates, and they come with $0 monthly or annual fees.
If you are paying a higher interest rate plus a $395 annual fee just to have an offset account that holds very little cash, you are likely paying for a feature you don’t need.
The Psychology of Debt: Discipline vs. Convenience
Beyond the math, there is a behavioural difference.
Offset requires discipline. Because the money is sitting in your everyday transaction account, it is incredibly easy to spend. You see the balance every time you buy a coffee. If you lack discipline, you might find yourself spending your savings rather than offsetting your mortgage.
Redraw adds friction. Because you have to physically transfer the money out of the loan to spend it, it makes you think twice. That extra step acts as a speed bump for impulse spending. For many people, this ‘out of sight, out of mind’ approach helps them save more aggressively.
When to Choose Which?
Choose an Offset Account if:
You keep a significant amount of cash in your account at all times.
You are a savvy budgeter who uses multiple "buckets" (different offset accounts) for tax, holidays, and bills.
You want to turn your future investment property into your current home (or vice versa) and need to preserve tax deductibility. This is a complex area you should discuss with your accountant and look for strategic advice from Imperium Finance.
Choose a Basic Loan with Redraw if:
You are on a budget. If cash flow is tight, why pay an annual fee? A Basic loan with a redraw facility offers the same interest-saving benefits with lower costs.
You want the lowest possible interest rate.
You prefer to make extra repayments and lock them away from daily temptation.
Final Thoughts
The Offset Loan isn't the status symbol it once was. For many borrowers, the humble Basic loan is the unsung hero of the mortgage market.
Don't automatically assume you need an offset account. If you don't have large sums of cash sitting idle, you might be paying a premium for a feature you aren't using.
Contact us today to review your current loan structure. We can calculate whether an Offset or a Basic loan will put more money back in your pocket.