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So what is the difference between an offset account and a redraw facility? This is a common question and quite often misunderstood.

So what is the difference between an offset account and a redraw facility? This is a common question and quite often misunderstood.

An offset account is a seperate account that sits alongside your loan account. It can be treated as an everyday transaction account where your pay can get directly deposited into the offset and bills can be paid directly out of this account. The key point is that the offset account sits alongside (and not part of) your home loan account. The money in your offset account is working to reduce the interest that you pay on your loan - with one important factor to note: that is, it doesn't reduce your loan balance.

In comparision, "redraw" is typically talked about in relation to the loan account itself. Many loans offer an all-in-one account where you can pay your salary into the loan and pay your bills directly out of the loan. The important point to appreciate here is that the balance will fluctuate on your loan.  For example, if you have a $300,000 home loan and you pay $50,000 into the loan - then provided your loan has a redraw facility, that $50,000 paid into the loan will cause the loan balance itself to reduce to $250,000. If you chose to redraw the $50,000 from the loan account, the balance would return to $300,000. In contrast, if you did have an offset account - then in this example the loan balance would remain at $300,000 even though you would only be paying interest on $250,000.

So what is the advantage of an offset account? You can maximise your tax deductibility in particular situations. Be sure to talk with your accountant about your own situation and how an offset may assist you. Whether the loan is for your own home or for an investment - it is worth reading my blog about the importance of an offset account when converting your home into an investment property. http://www.statecustodians.com.au/help/Ask-Heidi-Blog/Considerations-for-converting-a-home-loan-into-an-investment-loan