By default most home loans come with a redraw facility. Additional payments can be made against the loan which helps to reduce the interest of the loan. A redraw is precisely that any extra payments you make can also be redrawn at any time. Additional repayments help to pay down the loan sooner. The only drawback of the redraw facility is that you need to request for a redraw. Some facilities may have restrictions on amounts and how many can be made. For most people a redraw is suitable to their requirements.

Caution with some lenders redraws : Some lenders won't allow you to redraw the extra payment made. Instead they will reduce your  repayment amount according to the additional amount paid. Your broker / bank should advise you.

Offset

The offset account is similar to a redraw except it is a separate facility like a regular bank account. It offers all the features of a bank account including items such as credit cards. The only drawback of the offset account is generally the fee - some lenders charge $395 per annum for this service.

If you are an investor then for taxation purposes you should have an Offset.

How to use an Offset account effectively

To squeeze the most out of an offset one must use the offset account as their primary bank account where all wages and bills are paid from. You need to keep the average balance of your offset account greater than $10,000 just to cover the cost of the $395 fee @ 4% interest.

The other temptation is not to spend the money when you see such large amounts in your account. If you are one to be tempted some lenders allow for multiple offset accounts. So just like a separate  savings account you can hide money in another account, these accounts could be name school fees, holiday, emergency. Again be aware that each offset account may also have a fee associated with it.

Cheers

Peter

Not all Offset accounts are equal

You will always need to check with the lender to also see if the Offset account is 100% or partial.

Variable and Fixed Rates

Most lenders do not let you have a redraw or Offset account against a fixed interest rate portion of a loan. Generally only the variable portion allows facilities for offset and redraw. Note: With a fixed rate portion most lenders will allows you a per annum maximum deposit. Just be careful that these additional funds are accessible as a redraw.

Summary

If you are a conservative person or couple who are able to make extra repayments on a home loan and keep your normal checking account very lean than a redraw facility will be your best option. If you are a person who does not keep a tight budget and wants 24 access to your money then an offset account will suit you the best. Remember unless you keep a minimum balance in your offset account the annual fee may be eroding any benefit.