HLG020 Offset account vs redraw facility – the tax difference (515 words)

This article begins with an explanation of the difference between offset accounts and redraw facilities but then goes on to explain how these two are affected by tax. It is aimed at the investor, however, depending on what a current homeowner decides in the future, it could have a wider readership.

Most modern mortgages come with a redraw facility and a mortgage offset account.

With a redraw facility you can make additional payments to reduce the outstanding balance of your mortgage, which in turn reduces the amount of interest you pay. However, those additional repayments are not locked away – you can redraw on them at some point in the future. This increases the loan balance, so you’ll pay more interest.

An offset account works more like your day-to-day bank account. However the balance of the offset account is subtracted from the outstanding balance of your mortgage, and you only pay interest on this difference.

So which is the better way to manage your mortgage and minimise interest payments: redraw or offset?