The confusion about what is a redraw and what is an offset is not uncommon. These days every person with a variable rate loan probably has both.
A redraw amount is that amount of extra repayments that have been made into the actual loan account over and above the contracted repayments. This can occur when there have been ad hoc manual deposits into the loan account, or when preset repayments have a bigger principal portion when rates go down, or when repayments have a bigger principal portion due to offset account savings. The borrower is then able to redraw this amount from the loan account into their normal transaction account for personal spending. Some lenders may restrict the amount of redraw that can be accessed or charge a fee for the redraw depending on what type of loan has accrued the redraw amount. Fixed rate loans often do not have a redraw function so any extra repayments are locked in until the fixed rate period expires.
An offset account is any transaction/savings account that is ‘linked’ to the loan account. Daily interest on the loan account is calculated based on the offset account balance being subtracted from the loan account balance. This means that effectively the offset account is earning the same rate of interest as the rate on the loan. Not only is the interest rate higher than an unlinked transaction account but it is also tax free because any interest is deducted from loan interest rather than being credited to the transaction account as taxable interest income. This means that every dollar of savings in your offset transaction account is saving you loan interest on a daily basis.
This means that there is no financial difference between whether you transfer any spare funds into the loan account to create a redraw amount or simply leave spare funds in a linked offset account. Hence, the old debate about weekly, fortnightly, or monthly repayments is relevant since the advent of offset accounts since every dollar in an offset has the identical interest saving effect of that dollar being in the loan account.
If you are looking to review your banking structure and need a review of your finances to determine what banking facilities are appropriate for your needs, we are happy to do a no obligation finance health check.
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