You may wonder if you should choose offset or redraw when it comes to refinancing.

As interest rates rise, there's little doubt refinancing is a hot topic and so are crucial questions such as what will happen to your offset account or redraw facility when you refinance.

Yet even for those who don't plan to refinance, it's helpful to consider which option works best for you. Read on to find out more.

What is a redraw facility and how does it work?

A redraw facility is effectively a home loan bonus that allows you to redraw, or take back,  extra payments you've made on your loan. This can be helpful when emergencies or unexpected issues occur that spark the need for short-term cash and can allow you to enjoy a repayment "holiday" if you're unable to make repayments for a time. Best of all, the extra payments sitting in your redraw facility are reducing the interest on your loan. The downsides to redraws are that not all home loans offer them, particularly fixed-rate loans, and those that do include fees and charges. As well, the redraw process can differ between lenders so don't expect that emergency cash to be in your pocket overnight. Lenders may also limit the number and figure of redraws allowed. However, this last point can be beneficial as it forces you not to draw on this facility whenever you'd like some extra cash in hand.

What is an offset account and how does it work?

Similar to a redraw facility, you can still reduce the interest rate on your loan as this interest is "offset" against your home loan balance, minus the figure in your offset account. But the big difference between a redraw facility and an offset account is that the latter is a bank account and belongs to you, rather than your home loan lender. So, while offset accounts are linked to your home loan, they will not be affected by home loan lender issues. It's for this reason that many industry experts are now leaning towards offset accounts rather than redraw facilities. You can also utilise your offset account much as you would your average bank account and unlike a redraw facility, you'll have instant access to funds plus you can make deposits whenever you like. Many mortgage holders use their offset accounts as their main bank account, adding all their wages and major savings to it and keeping this cash there at all times. However, offset accounts are again only available with some home loans and are often not available at all with non-banks. Expect higher fees and charges with offset accounts compared to redraw facilities.

What happens to my redraw facility when I refinance?

Google this question and you won't find a quick answer. Here's what your Lending Loop team discovered:

1. Plenty of mortgage holders on Whirlpool and Reddit forums advise taking back all cash from your redraw facility before refinancing as you can lose access to this facility afterwards. However, at least one post suggested redraw cash would simply be "surplus funds" in a refinancing deal.
2. Australian content specialist website Take A Tumble advised that redraw balances can be transferred to a refinanced loan with the majority of lenders allowing this facility to continue with them; however, mortgage holders should expect different interest rates and details with their new lender. This same article also explained that while Australian banks can't steal a mortgage holder's redraw facility, they may take the cash in this facility if loan repayments aren't made or if a loan defaults.
3. Meanwhile, other consistent advice is to read every word of the fine print on home loan contracts as lenders often include redraw clauses to ensure their legal and financial safety is never at risk from defaults and similar. Words such as "refusing withdrawal requests at any time" and "cancelling your right to redraw any time" should be investigated before signing off on your home loan. But as a general rule of thumb ... a) expect most lenders' loan contracts to include such clauses and b) most lenders will only use extreme measures with redraw facilities if the mortgage holder has defaulted on their loan or is in arrears. Saying that such measures aren't uncommon or illegal.
4. Further research on this issue revealed it all comes down to the fact that redraw facilities are essentially part of your home loan contract and are therefore owned by the lender.  Your lender has the final say on what happens with your redraw facility and the repayments made into it. 

So, if you're refinancing with an existing redraw facility - or you want to begin one with your new lender or home loan - we advise you to look carefully through the contract fine print and talk with your refinancer lender about this issue.

What happens to my offset account when I refinance?

If you refinance to a different loan with the same lender, you should be able to keep your existing offset account. However, if you refinance to a different lender altogether, you will most likely need to open an offset account with that lender - although you may be able to keep your original offset account as a general savings account. As with redraw facilities, you may encounter different interest rates and fees when you refinance with either the same or a different lender.

We’re here to help

Whether or not you're refinancing, there's no right answer to the tricky question of whether you should choose offset or redraw. We do advise you to think carefully before signing on your home loan contracts' dotted line and obtain plenty of smart advice from people like us. We're happy to help all home buyers from first-home newbies to property investors, and we can find you the best possible deals from over 40 of Australia’s biggest banks and specialist lenders. So give us a call today at Lending Loop!