Offset vs Redraw: What’s the Difference and Which Is Right for You?

The short answer

Both an offset account and a redraw facility let your spare cash reduce the interest you pay on your home loan. The difference is where the money sits, how easily you can get it back, and what happens at tax time if the property ever becomes an investment.

For most owner-occupiers, the interest saving is the same. For anyone who might rent the home out later, choosing the wrong one can cost thousands in lost tax deductions.

What is an offset account?

An offset account is an everyday transaction account linked to your home loan. Whatever balance sits in it is subtracted from your loan balance before interest is calculated. Your salary can go in, your bills come out, and you keep a debit card like any other account.

The money is still yours. It never goes into the loan, so you can withdraw it at any time without asking the lender.

Example: You owe $600,000 at 6.00% p.a. and keep $50,000 in your offset. You pay interest on $550,000, not $600,000. That saves around $3,000 a year, or about $250 a month.

Your repayment usually stays the same, so that saving goes straight to paying down principal faster. Interest is calculated daily, so every dollar counts from the day it lands.

Things to know:

• Most offsets come with variable loans; fixed-rate options are limited or capped.
• Many lenders only offer offset on a package loan with an annual fee.
• Some offsets are partial (for example, 40%) rather than 100%. Always check.

What is a redraw facility?

Redraw lets you make extra repayments directly into your loan, then take them back out later if you need them. Those extra payments reduce your loan balance, so you pay less interest.

Example: Same $600,000 loan at 6.00% p.a. You pay an extra $50,000 into the loan, so it drops to $550,000. The interest saving is the same $3,000 a year as the offset.

The catch is access. Once money is in the loan, it is the lender’s money until you redraw it.

Things to know:

• Some lenders set minimum redraw amounts, charge fees, or take a day or two to release funds.
• Lenders can reduce or freeze available redraw, for example if you fall behind on repayments.
• Fixed-rate loans usually cap extra repayments and may not allow redraw at all.
• Some lenders lower your minimum repayment as you get ahead, which slows your progress unless you keep paying the original amount.
• Redraw usually comes free on basic loans, so there is no package fee.

Side by side

	Offset account	Redraw facility
Where the money sits	Separate account in your name	Inside the loan
Interest saving	Same dollar for dollar (if 100% offset)	Same dollar for dollar
Access	Instant, debit card, everyday banking	Via app or request; may have limits or delays
Can the lender restrict it?	No	Yes, in some circumstances
Typical cost	Often part of a package with an annual fee	Usually free
Fixed-rate loans	Limited availability	Usually capped or unavailable
If the home becomes an investment	Keeps your tax position clean	Can reduce future deductions
Best for	Salary, savings, emergency funds	Disciplined savers who rarely touch the money

The investor trap

If your home might become a rental one day, an offset is usually the safer choice. Interest is generally only tax deductible based on what the borrowed money is used for, and redrawing counts as new borrowing.

Example: Sam has a $600,000 home loan and builds up $150,000 in savings. Then Sam buys a new home and rents out the old one, using the $150,000 as a deposit.

• Savings in redraw: the loan sits at $450,000. Redrawing $150,000 for the new home is borrowing for private use, so interest on that portion is generally not deductible. Only the $450,000 still works for Sam at tax time.
• Savings in offset: the loan stays at $600,000. Sam takes the $150,000 from the offset, and the full $600,000 loan was used to buy what is now an investment property.

Same savings, same property, very different tax outcome. Rules depend on your circumstances, so always confirm with your accountant.

Which one suits you?

An offset usually suits you if:

• You keep meaningful savings, roughly $10,000 or more, that would otherwise sit idle.
• You want your salary and emergency fund working against your loan but still easy to reach.
• There is any chance you will rent the property out in future.

Redraw usually suits you if:

• You have smaller savings, where a package fee could outweigh the interest saved.
• You prefer your money to be slightly harder to spend.
• The property will always be your home, or it is already an investment you plan to keep.

Many borrowers use both, for example a split loan with an offset on the variable portion and limited extra repayments on the fixed portion.

Frequently asked questions

Do I earn interest on my offset balance?
No. Instead of earning interest, you avoid paying it at your home loan rate. Because you are not earning income, there is generally no tax on the saving.

Can I have more than one offset account?
Many lenders allow several offsets linked to one loan, which is handy for separating bills, savings and holiday funds.

Is my redraw money safe?
It reduces your debt, but it is not a deposit in your name. Lenders can restrict access in some situations, so keep your emergency fund somewhere you can always reach.

Is a package fee worth it for an offset?
Compare the annual fee against your expected interest saving. At 6.00% p.a., a $395 fee is covered once your average offset balance passes about $6,600.

Can I switch from redraw to offset later?
Often yes, by changing products with your lender or refinancing. Just know that moving redraw funds into an offset does not undo any tax issue created by money already redrawn.

Wallet or piggy bank?

Think of an offset as your wallet: your money is always within reach, and it’s working to cut your interest. Redraw is more like a piggy bank. It saves you the same interest, but getting your money out takes more effort, and if the property becomes an investment later, cracking it open can cost you at tax time.

Choosing the right setup now can save you thousands down the track. With access to over 40 lenders, our team of lending specialists will help you get it right from day one.

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General information only. This article does not consider your objectives, financial situation or needs and is not credit, financial or tax advice. Examples are illustrative and rates are hypothetical. Seek advice from a licensed credit adviser and your accountant before acting. Insight Property Finance.