ME Bank has been in the news a lot this week after they reduced the available redraw on some of their customers home loans. This has created some confusion of how redraw facilities work. Here is a simple explanation of the difference between a redraw facility and an offset account.
Redraw lets you access extra principal payments you have made on your loan. The benefit of making these additional principal payments means you reduce the amount owing, therefore reducing the interest payable. ME removed the amount of money that some customers could redraw. This removal was not across the board of all ME home loans with redraw available, it only affected some home loans and none that originated over the last 5 years.
An offset account is a savings account or transaction account linked to your home loan. The account’s balance (or a proportion of that balance) is ‘offset’ daily against your home loan balance, and as a result you’re only charged interest on the difference between the total loan balance and the amount offset.