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Difference between redraw and offset accounts

"Redraw" and "offset" accounts are financial features often associated with home loans or mortgages in Australia. In other countries, similar concepts exist but terms may be different. They provide different ways to manage your mortgage payments and can affect the interest you pay over the life of the loan. Here's a breakdown of the key differences!

Redraw Account

  1. Function: A redraw account is an additional feature linked to a mortgage account. It allows you to make extra repayments into your home loan and then withdraw (or "redraw") those extra funds when needed.
  2. Interest Calculation: The money deposited into the redraw account reduces the principal amount of the loan. As a result, you pay less interest because your loan balance is lower. This can help you pay off your mortgage faster.
  3. Access: You can access the funds in a redraw account, but there may be restrictions or fees associated with withdrawals. Some lenders limit the number of redraws per year, impose minimum redraw amounts, or charge fees for each redraw transaction.
  4. Interest Savings: While a redraw account reduces interest payments, the savings might not be as significant as with an offset account because the extra funds are not always in constant use against the loan balance.

Offset Account

  1. Function: An offset account is a separate transaction account linked to your mortgage. The balance in the offset account is subtracted from the outstanding loan balance before calculating the interest you owe.
  2. Interest Calculation: Money in an offset account reduces the principal amount on which interest is calculated. This means you pay less interest over the life of the loan, potentially saving you a substantial amount.
  3. Access: An offset account is essentially a regular transaction account. You can deposit and withdraw funds as you wish without limitations or fees. It functions like any other bank account.
  4. Interest Savings: An offset account typically offers more significant interest savings compared to a redraw account because the money in the offset account is continuously working to offset the loan balance.

Which One to Choose

Published on: Sep 12, 2023, 10:21 PM  


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