Offset Accounts vs Redraw Facilities: Which One Saves You More?
If you are comparing home loans, you have probably come across two features that sound similar but work quite differently: offset accounts and redraw facilities. Both can help you reduce the interest you pay on your mortgage, but they are not the same thing. The right choice depends on how you manage your money, whether you own an investment property, and what trade-offs you are comfortable with.
How Offset Accounts Work
An offset account is a regular transaction account that is linked to your home loan. The money sitting in this account reduces (or offsets) the balance that your lender charges interest on.
Here is a simple example. If your home loan balance is $500,000 and you have $40,000 in your offset account, the lender only charges you interest on $460,000. The $40,000 is still your money. You can spend it, transfer it, or use it for bills whenever you want.
Most offset accounts work like a normal everyday transaction account. You get a debit card, you can set up direct debits, and you can use it for your salary deposits. The difference is that every dollar in there is working to reduce your home loan interest.
Interest is typically calculated daily on the reduced balance. So even money that sits in your offset for a few days before being spent is still saving you something.
How Redraw Facilities Work
A redraw facility lets you access extra repayments you have already made on your loan. If your minimum repayment is $2,500 per month but you have been paying $3,000, that extra $500 each month builds up as available redraw.
When you need the money, you can redraw it back into your bank account. The process varies by lender. Some let you redraw online instantly, while others take one to three business days.
The key difference from an offset account is that redraw funds have technically been used to pay down your loan principal. When you redraw, you are essentially re-borrowing that money. This distinction might not seem like a big deal day to day, but it has real tax implications if the property is an investment.
Side-by-Side Comparison
| Feature | Offset Account | Redraw Facility |
|---|---|---|
| What it is | A separate transaction account | Part of your loan account |
| Access | Instant (debit card, transfers) | 1-3 business days typically |
| Minimum withdrawal | No minimum | Some lenders set a minimum |
| Fees | Monthly fee or higher rate | Usually free |
| Tax impact (investors) | No impact on deductibility | Can affect interest deductibility |
| Ownership of funds | Your money (legally separate) | Repaid loan funds (lender holds) |
Tax Implications for Property Investors
This is where the choice between offset and redraw really matters.
With an offset account, the loan balance itself does not change. You still owe $500,000. The $40,000 in your offset just reduces the interest charged. If the property is an investment, the full $500,000 loan remains tax-deductible because the loan purpose has not changed.
With a redraw, it is different. When you make extra repayments, your loan balance actually decreases. If you then redraw that money for personal use (say, a holiday or a new car), the ATO considers that portion of the loan to have a different purpose. The interest on the redrawn amount may no longer be tax-deductible.
This can get messy. If you are an investor or think you might convert your home into a rental property one day, an offset account is the safer choice. It keeps your loan structure clean and your interest fully deductible.
Always check with your accountant before making decisions about investment property loan structures. The rules are specific and getting them wrong can be expensive.
Costs to Consider
Offset accounts are not always free. Many lenders charge either a monthly fee ($10 to $15 per month) or offer offset accounts only on loan packages that come with a slightly higher interest rate (often 0.10% to 0.15% higher).
On a $500,000 loan, a 0.10% rate increase costs you about $500 per year. So your offset account needs to save you more than $500 per year in interest to be worth it. If you are keeping $20,000 or more in the offset, it almost certainly pays for itself. If your balance is usually below $5,000, you might be better off with a basic variable loan that has a lower rate and a free redraw.
Redraw facilities are usually free, but check your lender's terms. Some charge per-redraw fees or set minimum redraw amounts.
Worked Example
Let us say you have a $500,000 home loan at 6.0% over 30 years. You consistently keep $50,000 in your offset account (or make $50,000 in extra repayments available via redraw).
| Scenario | Interest saved | Time saved |
|---|---|---|
| No offset, no extra repayments | $0 | 0 years |
| $50,000 in offset account | ~$82,000 | ~5 years |
| $50,000 extra repayment (redraw) | ~$82,000 | ~5 years |
The interest savings are the same in both cases. The difference is in the flexibility, access, and tax treatment. For a home you live in, both work equally well financially. For an investment property, offset wins on tax grounds.
Which One Should You Choose?
Choose an offset account if:
- You want instant access to your funds (debit card, everyday spending)
- You own or plan to own an investment property
- You keep a consistent cash balance that would benefit from daily interest savings
- You are comfortable paying a small monthly fee or slightly higher rate
Choose a redraw facility if:
- You want the lowest possible interest rate with no extra fees
- You do not need instant access to extra funds
- The property is your primary residence and you have no plans to rent it out
- You prefer the discipline of money being slightly harder to access (out of sight, out of mind)
Some people use both. They keep their emergency fund and everyday cash in an offset account, and make regular extra repayments that build up in a redraw for larger planned expenses like renovations.
Find loans with the features you need
Looking for a loan with an offset account? Our Compare page lets you filter by loan features including offset accounts and redraw facilities across dozens of Australian lenders.
Want to see how different loan features affect your total cost? Our Scenario Analysis tool lets you compare loans side by side with different rates, fees, and offset balances to find the best overall deal.
See how much an offset could save you
Model different offset balances and see the interest savings.
Sources
- MoneySmart — offset accounts
- ATO — interest expenses for rental properties
- MoneySmart — choosing a home loan
The information in this article is general in nature and does not constitute financial or tax advice. Tax implications depend on your individual circumstances. Always consult a qualified accountant or financial adviser. Read our full Disclaimer.