Redraw Facility vs Offset Account: Why your choice matters in the COVID-19 environment

Redraw facility vs offset account – which is better, and why?

Most modern home loans today come with the option to open a linked offset account  or provide access to a redraw arrangement. These options are very popular, and are often taken up by borrowers. In fact, if you currently have a home loan, chances are you already have one or both options available to you.

In part they are very popular because they allow you to use your savings to reduce your loan balance. And that means borrowers pay less interest over the life of the loan. Additionally, when you put extra money into an offset or redraw facility, you can access the extra cash in case of an emergency or when you’d like to use it for something specific. That means your savings are both working for you and available to you.

Because both these options offer fantastic incentives, borrowers don’t always dig deeper into the features of these facilities. And in some situations the bank might have more rights to your money than you think.

So, what is a redraw facility and what is an offset account? Which is better for your situation? And where are your risks?

What is a redraw facility?

With a redraw facility, you deposit extra money that you wish to save directly into your home loan account. This reduces the balance on your home loan account, but allows you to redraw the additional repayments made against your home loan. As you are reducing your scheduled loan balance, your minimum loan repayments may be reduced.

For example, if you have a mortgage of $400,000 at an interest rate of 3.00% for 30 years, your monthly repayment would be $1,686. If you deposit $30,000 into your loan account, your balance will reduce to $370,000 and your minimum monthly repayments reduce to $1,560. In this case you would be able to ‘redraw’ any additional funds from your mortgage when needed.

If you do access your redraw, your minimum repayments will then increase. We usually recommend that when depositing additional savings directly into your home loan, continue with the original loan repayments. That way you’ll pay your home off quicker and ultimately pay less interest.

What is an offset account?

An offset account is very similar to a redraw facility in that the balance in your account is offset against your home loan principal daily, effectively bringing down the amount of interest you pay. Unlike a redraw facility, however, an offset is more like a regular transaction account that is linked to your home loan. The more money that you have in the account, the less interest that you pay overall.

Because it’s a transaction account, you can have your regular salary deposited into the account each time you’re paid. This ensures that you maintain a high balance for the maximum number of days.

Redraw facility versus offset account

In general redraw facilities and offset accounts are very similar. They both help you pay down your home loan more quickly and with relative ease.

So, which is better? And why?

Pros and cons of offset accounts

• Easy access to funds. Since they are more like a regular transaction account, offset accounts give you easier access to your funds. They’re also more likely to come with ATM access and a banking card (though many redraw facilities offer this as well) and there aren’t usually fees.
• The account is your asset. Because an offset account is a separate savings account it remains an asset of the borrower. This means it can’t simply be cancelled at any time.
• More flexibility with your home loan strategy. If your plan is to ultimately upgrade your home while retaining your current home as an investment property, holding funds in a 100% offset account vs redraw facility will give you more flexibility for that purchase.

Pros and cons of redraw facilities

• Limitations on access. Redraws often have restrictions on the number of free redraws or limit the amount you can redraw in a year. Some lenders will also charge an admin fee for any redraw made.
• Can be CANCELLED at any time. A redraw is a feature of a loan, which means that banks can cancel that feature at any time. While notice should always be provided, how this is done in practice will always be questionable.

Important Note About the ‘All Moneys Clause’

Within a mortgage contract there is a clause known as the ‘All Moneys Clause’. This clause provides that the property that is the subject of the mortgage (your home in the case of a home loan) is security for that mortgage but also for any other loans that might be made from the bank to you. This could include personal loans and credit cards.

Banks are also permitted to use funds held in both redraw facilities and offset accounts to pay down arrears. While prior to COVID-19, this was something that was never done, there has been at least one bank taking advantage of this option and using the ‘all moneys’ clause to transfer money directly out of customer’s redraw facility to cover missed loan payments. In many situations, they have not even given proper notice.

This has been incredibly difficult for customers who were relying on that money as their ‘savings’ to help them through a financially difficult period. While there have been calls that this is not a moral action (and we agree), it is likely that the bank is within their ‘legal’ rights under the all moneys clause.

In this time of uncertainty, and in light of the actions that have already been taken by one lender, it might be a good idea for borrowers to transfer any ‘redraw’ component of their loans to a separate online savings account (without direct debit access). This will safeguard against banks cancelling the redraws available on loans. It will also stop lenders from accessing the money that you have set aside as savings in your redraw or offset facilities.

And the winner is…

An offset account allows you more access to and control over your money. And at this time, and in this current environment, cash and control are extremely important.

Of course, everyone’s situation is different and yours is sure to be unique to you. Talk to your mortgage broker. They can give advice about the best way to pay down your home loan while keeping your savings accessible.

If you’d like to discuss your home loan options or whether a redraw facility or offset account is right for you, get in touch.

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