When buying a property , the choice between offset and redraw accounts, as well as fixed and variable interest rates, can significantly impact your financial strategy. These decisions can feel overwhelming, but understanding the differences will empower you to make the best choice for your situation.
In this episode of the Get Rich Slow Club podcast, Tash and Ana are joined by mortgage broker Maddie Walton from Money Lounge, to break it all down.
Offset vs redraw accounts
Both offset accounts and redraw facilities help reduce the interest you pay on a home loan , but they work in different ways. Knowing their differences can help you choose the right one for your financial situation.
What is an offset account?
An offset account is a separate transaction account linked to your home loan. Any money sitting in this account reduces the loan amount on which you are charged interest.
For example, if you have a $500,000 home loan and $100,000 in your offset account, you’ll only be charged interest on $400,000. This can be an effective way to cut down interest payments while keeping your savings easily accessible.
Offset accounts are particularly useful because they allow you to access your savings at any time while still reducing your interest charges. Maddie highlights that they also ensure the full loan amount remains tax-deductible if the property is an investment.
What is a redraw facility?
A redraw facility allows you to make extra payments towards your home loan and withdraw those extra funds when needed. While this may seem similar to an offset account, redraw facilities are embedded within the home loan itself rather than being a separate account. This means the extra repayments you make reduce your loan balance directly.
However, redraw facilities come with restrictions. Some banks require a waiting period before you can withdraw, impose minimum redraw amounts, or even limit access at their discretion.
As Maddie explains: "Technically, it’s the bank’s money at the end of the day. If they decide at some point they don’t want to give that back to you, they can."
Which one should you choose?
Offset accounts generally offer more flexibility, but they often come with higher fees or slightly higher interest rates.
Redraw facilities, on the other hand, may have fewer fees but can be less accessible in times of need.
Maddie suggests considering how much money you plan to keep in the account: "If you have less than $10,000, an offset account may not be worth [the fees]."
Fixed vs variable interest rates
When taking out a home loan, borrowers must decide whether to opt for a fixed or variable interest rate. Each option has its advantages and disadvantages.
What is a fixed interest rate?
A fixed interest rate means your loan repayments stay the same for a set period – typically between one and five years in Australia. This provides certainty over repayment amounts, potentially making budgeting easier.
Maddie says fixed rates can be great for people who need stability, especially if they've got a family and need to know exactly what their mortgage repayments will be.
However, fixed loans come with limitations. They often don’t allow offset accounts, have caps on extra repayments, and charge break fees if you wish to exit early.
What is a variable interest rate?
A variable interest rate fluctuates based on the Reserve Bank of Australia ’s (RBA) cash rate and the lender’s discretion. This means your repayments may increase or decrease over time.
Variable loans often provide more flexibility, allowing extra repayments, offset accounts, and easier refinancing. However, they come with uncertainty, which may be challenging for borrowers on a tight budget.
Which one should you choose?
Deciding between fixed and variable rates depends on your risk tolerance and financial goals. Maddie notes that many borrowers assume variable rates are always the best option: "In the industry, the sentiment is that you should always pick variable because it usually wins out."
But, if you need stability, fixed might be the way to go.
A strategy some borrowers, like Ana and Maddie, use is a split loan – where part of the loan is fixed and the rest is variable. This provides the benefits of both options.
The impact of brokers and commissions
Mortgage brokers can play a key role in helping borrowers choose the right loan, but it’s important to understand how they are paid. Maddie explains that brokers receive commissions from lenders: "We get paid around 0.65% of the loan amount at settlement and 0.15% per year after that."
This commission structure means some brokers may have incentives to recommend fixed loans with shorter terms.
Maddie encourages borrowers to ask their broker why they are recommending a particular product. Your best bet is to find a broker who works for you, not just one who is looking at their own commissions.
Key takeaways
Choosing between offset and redraw accounts and deciding on a fixed or variable rate can be complex. But, it ultimately comes down to your financial situation and goals.
Offset accounts provide flexibility but may come with fees, while redraw facilities can be restrictive but cost-effective. Fixed rates offer certainty but lack flexibility, whereas variable rates can be risky but often provide long-term savings.
At the end of the day, there’s no one-size-fits-all answer. The best choice depends on your financial habits, goals, and how much certainty you need in your repayments.
If this episode sparked something in you, give it a five-star rating, drop a review, or better yet, share it with a friend. And if you're just starting out, the first ten episodes will get the financial gears turning. Follow us at @getrichslowclub and catch our personal updates at @tashinvest or @anakresina.
Happy investing!
