Redraw facility vs offset account - how to save interest on your home loan

Let’s look at redraw vs offset, and which of these home loan features might be better for your financial situation.

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Redraw facility vs offset account - how to save interest on your home loan

20 March 2024

Both a redraw facility and offset account could help you save interest on your home loan. Let’s look at redraw vs offset, and which of these home loan features might be better for your financial situation.

Redraw vs offset

A redraw facility allows you to make additional repayments into your home loan account, effectively reducing your loan balance, and then have access to these additional repayments later if you need to.
An offset account is an everyday banking account which you can link to a variable rate home loan to offset the balance. The more you have in this account, the less interest you’ll be charged on your home loan because interest is calculated on the loan balance less the value of the offset.

Before comparing them further, let’s dive into how each of them works.

How a redraw facility works

Available on some home loans (including all RAMS home loans), a redraw facility allows you to redraw, or take out, any extra repayments you’ve made on your home loan. In this case, extra repayments mean those paid over and above your agreed minimum monthly loan repayment amount.

Making additional repayments on your loan reduces the amount you owe, while also acting like savings. You don’t earn interest on those extra funds, but you also don’t pay home loan interest for that same amount.

Benefits of redraw facilities

Any extra you pay off your home loan amount reduces the amount of interest you’re charged on that loan. This is the case even if you only keep it on the home loan for a short time, as loan interest is calculated daily on the loan balance.
The flexibility to use those extra funds when you need them. Just transfer them from your home loan into an account to access the money.
With RAMS, there’s no annual limit on the amount or number of redraws you make. Note – there are minimum redraw amounts.The fact that you need to transfer the additional funds to your everyday transaction account to access them means you’re less likely to use them for ‘impulse’ purchases.
If you have enough extra funds paid in, redrawing them from your home loan could work out less expensive than taking out a separate personal loan (e.g. for a car purchase) – If you don’t pay it back in a comparable timeframe, this could lead to paying additional interest, given the greater length of a home loan term.

Considerations for redraw facilities

Many loans may have conditions attached to the redraw facility, for instance, a minimum redraw amount (e.g. RAMS fixed rate home loans have a $1,000 minimum redraw).
As you need to transfer the amount into a transaction account, the redraw funds aren’t as easily accessed for day-to-day needs.
You can only redraw extra home loan repayments you’ve made; you can’t redraw the minimum repayments you are required to make on your home loan.

How an offset account works

An offset account, like the one RAMS offers, is an everyday bank account that’s linked to your home loan. It works by ‘offsetting’ any money in that account against the amount remaining on your loan.

That means you aren’t charged interest on the home loan for the amount in the offset account as home loan interest is calculated on the loan balance less the value of the offset.
You’ll save interest charges even if you only have money in the offset account for a short period of time as interest is calculated daily.

Benefits of offset accounts

It reduces the balance that the interest is being calculated at.
By having your income paid into an offset account, and using it as your transaction account, you could make full use of your available funds to reduce the interest charges on your home loan.
Because an offset account is a day-to-day transaction account, you have easy access to those funds; you could make withdrawals whenever you like and whatever is left in the account each day is offset against your home loan balance.

Considerations for offset accounts

Offset accounts are not available for all home loan types.
Some offset accounts may come with fees and charges (RAMS have no account fees).
Having easy access to large amounts of money could tempt some into overspending, reducing their home loan interest savings.

What’s the difference between a redraw facility and an offset account?

Does redraw work the same as an offset account?

The good news is your home loan interest will reduce by the same amount – whether you park your spare money in your home loan as redraw or an offset account. And depending on the type of loan you have, you may be able to use both an offset and redraw. However, as this table shows, there’s more to consider:

	Redraw facility	Offset account
How it could save you money	Adding extra funds directly into your home loan reduces your home loan balance.	Money in your offset account is offset against your home loan balance, reducing your home loan interest.
How you access the money with a RAMS Home Loan	Use myRAMS or Access One to transfer funds from your home loan account to a transaction or everyday account. With RAMS fixed rate home loans, a minimum redraw of $1,000 applies.	Like a regular debit account, e.g. with a debit card, myRAMS or Access One
What it costs with RAMS	With RAMS, there are no charges to use the redraw facility.	With RAMS there are no account fees. Overseas ATM and foreign transaction fees may apply.
RAMS availability	Available on all RAMS variable rate home loans.	With RAMS, available with our Full Feature home loan (when interest is variable).
Good for	People who are saving for something bigger, like renovations or travel, or as a ‘just in case’ fund.	People who need day-to-day access to funds.

Is it better to redraw or offset?

There’s not really an absolute ‘better’, just what works better for you.

And as the table shows, whether you park your spare money in your home loan as redraw or an offset account, your home loan interest will reduce by the same amount.

So to figure out what’s better for you, think about:

Whether the loan you’re considering offers that facility.
If you want it to save, or access day-to-day.
Would you be tempted if these funds were easily available on a debit card?
Are both available on the one loan? And if so, would that work better, e.g. an offset for everyday use, and redraw for savings?
Are there any other advantages you could gain

Other questions relating to redraw facility and offset accounts

Savings account vs redraw and offset

Some people ask whether it’s better to put money in a redraw or offset, or in a savings account:

If you put money in a savings account, you’ll earn interest on those funds, however if the interest rate on the savings account is less than your home loan interest rate you will earn less interest compared to the interest you could save if the money was in offset or redraw.
If that same money is in a home loan with redraw, or in an offset account, you won’t earn the savings account’s interest, but you’ll save in home loan interest charges as you’ll owe less on that loan.

For example, Kate and Justin have sold their second car and now have $20,000 in extra cash. There are expenses coming up on their home in about a year, so they want easy access to those funds. They could put the money in a savings account, or make use of either their home loan’s redraw facility or linked offset account. Their aim is to put it where they’ll gain the most financial benefit overall.

	In a savings account	In a home loan with redraw facility	In an offset account linked to their home loan
Extra payment amount	$20,000	$20,000	$20,000
Interest rate	Account pays 5% p.a.	Loan charges 6.09% p.a.	Loan charges 6.09% p.a.
Interest earned/ saved over 1 year	Earn $1,026 in interest	Save $1,331 in interest charges¹	Save $1,331 in interest charges¹
Net earnings and savings	Earn $1,026 on savings²	Earn $0 on savings Save $1,331 on home loan interest¹	Earn $0 on savings Save $1,331 on home loan interest¹

¹ Home loan interest saving based on a loan mount of $450,000 and the $20,000 being in redraw or offset from the beginning of the loan.

²Earned interest assumes the $20,000 held in the saving account for 1 year with no additional funds deposited or withdrawn from saving account, and no change to the interest rate.

In this example, Kate and Justin are better off putting their extra money against their home loan rather than in a separate savings account. Whether it’s in the loan with redraw or an offset account makes no difference – as long as the $20,000 stays there for the whole year.

Some people do have reasons to keep their savings separate from their home loan. That’s why it’s worth doing the numbers to make sure you’re making the best decision for you.

Who might a redraw facility suit?

A redraw facility might be better suited to people who need occasional access to funds. For instance, if it’s for expenses they know are coming up, saving for something, or for ‘just in case’.

Does redraw reduce loan balance?

It depends on what you mean by ‘redraw’.

Money parked in your loan with a redraw facility will decrease your loan balance and therefore the interest chargeable.

However, when you redraw money parked in your loan, your loan balance increases, and interest is calculated on a higher balance.

Why do banks offer redraw facilities?

Redraw allows borrowers to make extra repayments on their loan principal, but still have access those extra funds if they need them later. It gives people more flexibility while potentially lowering the amount of interest they pay on the loan.

Want to know more?

There are plenty of ways to get help seeing what’s right for you. Find out more on redrawing or an offset account. Alternatively, contact your local RAMS Home Loan Centre or call us on 13 RAMS, that’s 13 7267.

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