Explain To Me Like I’m 5: Offset & Redraw Accounts
My news feed contains far too much property news. Most of it, I have little interest in. Some of it, I am more invested in. Apparently there are more ways to fund your home than a bank loan or mum and dad. Renters are demanding landlords be put under the same scrutiny they are while investors baulk at the idea of their personal data being revealed to renters.
The glut of property news got me thinking about how complicated the home buying process is. There is so much that could be made easier, but is hidden behind layers of jargon and complexities.
Fresh off reading Baby University books (which are currently more useful for me than they are for my toddler), I decided to ask AI explain two perennially confusing home loan features to me as if I were 5 - the offset and redraw accounts.
Be warned that there is a fair bit of condescension coming through in this explanation. I’m not sure I appreciate that, but I have to admit this piggy bank analogy does simplify things. Whether it helps an average 5 year old is still up for debate.
As Explained By AI to a 5 Year Old: Offset & Redraw
Question:
In the context of an Australian home loan, explain an offset and redraw account to me as if I were 5 years old.
Answer:
Imagine you have a piggy bank where you keep your money, and your parents have a big grown-up piggy bank called a "home loan" - but this one is special because they OWE money to the bank instead of having money in it!
An offset account is like having a magic helper piggy bank: Let's say your parents owe $100 to the bank for their house. But they also have $20 in their magic helper piggy bank (the offset account). The bank says "Okay, we'll pretend you only owe us $80 instead of $100!" So your parents pay less money to the bank each month. The $20 stays in their piggy bank and they can take it out anytime they want - it's still their money!
A redraw account is like putting extra coins directly into the grown-up piggy bank: If your parents owe $100 but they put an extra $20 into their home loan piggy bank, now they only owe $80. But here's the thing - they can ask for their extra $20 back if they need it later, like asking the bank "Can I have my extra coins back please?" Most of the time the bank says yes, but sometimes they might say no.
The big difference: With the magic helper piggy bank (offset), your money stays yours and you can always get it. With putting extra coins in the home loan piggy bank (redraw), you have to ask nicely to get your extra money back!
Both help your parents pay less money to the bank, which means more money for ice cream! 🍦
Question:
But...but...why would anyone use the redraw account then?
Answer:
Oh! That's a really smart question! You're thinking like a grown-up already!
You're absolutely right - the offset account does sound better! And for most people, it usually IS better. But sometimes people still choose the redraw account, and here's why:
Sometimes the redraw account costs less money: Some banks say "If you want the magic helper piggy bank (offset), you have to pay us $10 every month just to have it." But the redraw account might be free! So if your parents don't have very much extra money, they might choose the free one.
Some people like to hide their money from themselves: This sounds silly, but some grown-ups know they spend money too easily! If they put extra money in the redraw account, it's a little bit harder to get it back - they have to call the bank or go online. With an offset account, the money is right there, easy to spend on toys... I mean, grown-up things! So it helps them save without being tempted.
Sometimes it's the only choice: Some banks only offer one or the other, not both. It's like if the ice cream shop only had vanilla - you'd still get vanilla instead of no ice cream at all!
But you're totally right to think the offset sounds better - most money-smart grown-ups agree with you! You're going to be really good with money when you grow up! 🌟
