Offset Account vs Redraw Facility: What's Best for Your Home Loan?

by Armond Shoostovian, CEO at Medical Finance Group

When it comes to choosing the right home loan structure, understanding your options can make a significant difference to your financial future.

Two of the most commonly discussed features are offset accounts and redraw facilities. While they may appear similar at first glance, they serve different purposes and offer unique benefits depending on your financial habits and goals.

I will explore the pros and cons of each and help you determine which one may be better suited to your needs.

This is especially relevant for professionals seeking home loans for healthcare workers in Australia including home loans for doctors or home loans for nurses, who often seek loan features that offer flexibility and savings over time.

What is an Offset Account?

An offset account is a transaction account linked to your mortgage. The money you keep in this account is offset daily against your home loan balance, reducing the amount of interest you pay. For example, if you have a home loan of $500,000 and you keep $50,000 in your offset account, you'll only be charged interest on $450,000.

Pros of an Offset Account:

Interest Savings: The more you keep in your offset account, the less interest you pay. This can significantly reduce the life of your loan and save thousands in interest.
Easy Access to Funds Since it functions like a transaction account, you can deposit and withdraw money at any time without restrictions.
Flexible Financial Management: You can use the account for your everyday spending while simultaneously saving on your mortgage interest.
Tax Efficiency: For investment properties, offset accounts can help you preserve the deductible portion of interest, unlike redraws which may complicate tax implications.

Cons of an Offset Account:

Fees and Costs: Loans with offset accounts may come with higher interest rates or account fees.
Discipline Required Because funds are easily accessible, there is a temptation to dip into savings, which could impact the effectiveness of the offset.
Minimum Balance Requirements: Some lenders require a minimum amount in the offset account to make it worthwhile.
Fixed Loans: Very few lenders offer a 100% offset account on a fixed rate home loan. The good news however, is you can get a 100% offset account on a fixed or variable loan from Medical Finance Group.

What is a Redraw Facility

A redraw facility allows you to make extra repayments on your mortgage, which reduces your loan principal and interest payable. You can later withdraw those extra repayments if you need them.

Pros of a Redraw Facility

Lower Interest Payments: Like offset accounts, additional repayments reduce the interest you pay over time
Discipline through Restricted Access Since access to redraw funds is usually more controlled, it encourages long-term saving behaviour.
Reduced Temptation to Spend: Withdrawing funds often requires going through a lender’s platform or waiting a few days, which discourages impulsive spending.
Loan Reduction: Any extra repayment goes directly toward reducing your loan, which can help you pay off your mortgage faster.

Cons of a Redraw Facility:

Limited Access: Unlike offset accounts, you may face delays or restrictions when withdrawing your funds.
Lender Conditions Some lenders impose limits on how much and how often you can redraw.
Potential Fees: There may be redraw fees or minimum withdrawal amounts, depending on your lender.
Tax Implications: For investment properties, redrawing funds can affect the tax-deductibility of interest, depending on how the funds are used.

Scenario: Emma, a Nurse from Brisbane

Let's consider Emma, a registered nurse in Brisbane, who recently purchased her first home. She took out a $600,000 mortgage and wants to make the most of her income and savings while managing her home loan.

Emma has $40,000 in savings. She is weighing the benefits of using an offset account versus making extra repayments into her loan with a redraw facility.

Option 1: Offset Account: Emma deposits the $40,000 into her offset account. Her daily interest is calculated based on a loan balance of $560,000 instead of $600,000. She can still access the full $40,000 at any time for emergencies or large purchases.
Option 2: Redraw Facility Emma makes a lump sum repayment of $40,000. Her loan balance is now $560,000, and she starts saving on interest. However, if she needs the money, she has to log into her banking portal and request a redraw, which could take a day or two. Additionally, if her lender charges a fee for redrawing or limits the frequency of access, that could be a drawback.

In Emma's case, if she values easy access to funds and wants flexibility for future expenses like travel, education, or home improvements, an offset account may be the better choice.

However, if she’s confident she won’t need those funds and wants to stay disciplined, the redraw facility can help her pay off her loan faster.

Which Option is Best for You?

Both features have their merits, and the best choice depends on your financial situation and habits:

Choose an offset account if you:
1. Have substantial savings or expect to keep a high balance.
2. Want flexibility and immediate access to your funds.
3. Prefer using one account for both daily spending and mortgage offsetting.
Choose a redraw facility if you:
1. Want to reduce your loan as fast as possible.
2. Don’t need immediate access to your extra repayments.
3. Tend to spend savings impulsively and prefer a barrier to access.

Special Considerations for Healthcare Professionals

For healthcare workers, choosing the right home loan structure is particularly important. Many lenders offer tailored products for professionals such as:

Home loans for doctors: These often come with special interest rates, higher borrowing limits, or waived LMI (Lenders Mortgage Insurance).

Home loans for nurses: Recognising the stable income and essential nature of this profession, many lenders offer competitive packages.

Home loans for healthcare workers Australia: From paramedics to aged care workers, these loans often provide flexible repayment options, discounted rates, and beneficial features like offset or redraw facilities.

Both offset accounts and redraw facilities offer powerful ways to reduce interest and pay off your home loan sooner. Each has its advantages and limitations, so it’s crucial to evaluate what matters most to you. If you’re a healthcare professional looking for guidance on the best loan structure, consider speaking to a finance specialist who understands the unique needs of your industry.

At Medical Finance Group, we help doctors, nurses, and healthcare workers across Australia find home loan solutions that fit their lifestyle and career. You have been there to look after us. Now it’s our turn to look after you. So, whether you're after flexibility or focused on long-term savings, we're here to help you make informed financial decisions.