Offset Account vs Redraw Facility: Which Saves You More?
Compare mortgage offset accounts and redraw facilities in Australia. Understand the key differences, tax implications, and which option saves you more interest in 2025-26.
How an offset account works
A mortgage offset account is a transaction account linked to your home loan. The balance in the offset account is 'offset' against your mortgage balance, reducing the amount of interest you pay. **Example:** You have a $500,000 mortgage at 6.5% interest and $50,000 sitting in your offset account. The bank calculates interest on $500,000 - $50,000 = $450,000 instead of the full $500,000. **The interest saving:** - Without offset: $500,000 × 6.5% = $32,500/year in interest - With $50,000 offset: $450,000 × 6.5% = $29,250/year - **Annual saving: $3,250** (or $271/month) Over the life of a 30-year loan, maintaining $50,000 in an offset account saves approximately $98,000 in interest and cuts 3-4 years off your loan term. **Key features:** - Works like a regular transaction account — you can deposit, withdraw, use a debit card, set up direct debits, receive your salary - Interest is calculated daily, so every dollar counts from the day it lands - You can have 100% offset (every dollar reduces interest) or partial offset (only a percentage counts) - Most offset accounts require a package home loan, which typically costs $300-$400/year in annual fees - Your money is not locked away — you have full access at all times **Important distinction:** A 100% offset account gives you the same mathematical benefit as earning the mortgage interest rate on your savings, but TAX-FREE. If your mortgage rate is 6.5%, having money in the offset is equivalent to earning 6.5% interest in a savings account — but you do not pay tax on offset savings. To earn the same after-tax return from a savings account, you would need an interest rate of approximately 9.3% (at a 30% tax rate).
How a redraw facility works
A redraw facility lets you make extra repayments on your mortgage and then 'redraw' (withdraw) those extra payments if you need the money back. **Example:** Your minimum monthly repayment is $3,200, but you pay $4,200 each month — an extra $1,000. After 2 years, you have $24,000 in extra repayments available to redraw. The interest benefit is the same as an offset: the extra $24,000 reduces your loan balance, so you pay less interest. **Key features:** - Usually free (no annual fee, unlike most offset accounts) - The extra payments reduce your loan balance immediately - You can access funds when needed, but there may be minimum redraw amounts ($500-$2,000) - Some lenders charge a redraw fee ($0-$50 per withdrawal) - Available on most variable-rate home loans - Some fixed-rate loans offer limited redraw **How it differs from offset:** - Offset: your savings sit in a separate account and reduce the interest charged on your mortgage, but the mortgage balance stays the same on paper - Redraw: your extra payments actually reduce the mortgage balance. You are technically ahead on your loan schedule The mathematical outcome is identical if you have a 100% offset. The differences are practical and legal, which we will cover in the next section. **Warning:** Some lenders can restrict or remove redraw access. During the COVID-19 pandemic, some lenders limited redraw withdrawals, causing financial stress for borrowers who relied on their redraw as an emergency fund. An offset account cannot be restricted in the same way because it is your own transaction account.
The critical tax difference for investment properties
This is where the offset vs redraw decision really matters — and where many investors make a costly mistake. **The problem with redraw on investment properties:** When you redraw funds from an investment property loan and use them for personal purposes (holiday, car, renovations on your home), the ATO treats the redrawn portion as a new personal loan. The interest on that portion is no longer tax-deductible because the funds were not used for income-producing purposes. **Example of the tax trap:** You have a $400,000 investment property loan. Over 5 years, you make $80,000 in extra repayments (loan balance now $320,000 on paper). You then redraw $80,000 to renovate your own home. The ATO now treats your loan as: - $320,000 investment purpose (interest deductible) - $80,000 personal purpose (interest NOT deductible) At 6.5% interest, that is $5,200/year in interest deductions you lose — costing you approximately $1,900/year in extra tax (at 37% marginal rate). **How an offset avoids this:** With an offset account, the $80,000 sits in your account (separate from the loan). When you withdraw it, the loan balance has never changed — it is still $400,000 of investment debt. All interest remains fully deductible. **The rule is simple:** - Owner-occupied home: offset and redraw work equally well (no tax deductions either way) - Investment property: ALWAYS use an offset account, never make extra repayments into the loan itself - If you might convert your home to an investment property in the future: use an offset now to preserve your future deductibility This is one of the most important tax planning decisions property owners make, and getting it wrong can cost tens of thousands of dollars over the life of the loan.
Offset account strategies to maximise your savings
An offset account rewards you for keeping your balance as high as possible, for as long as possible. Here are proven strategies to maximise the benefit: **1. Salary parking:** Have your salary paid directly into your offset account. Even if you spend most of it throughout the month, the days where the balance is high reduce your interest. On a $500,000 mortgage, having an extra $5,000 sitting in the offset for just 15 days each month saves approximately $400/year. **2. Bill timing:** Pay all bills on their due date, not early. If a bill is due on the 28th, pay it on the 28th — not the 15th. Those 13 extra days of the money sitting in your offset account reduce your interest. **3. Credit card float:** Use a credit card with up to 55 days interest-free for daily expenses, while keeping your cash in the offset. Pay the credit card in full on the due date. This keeps your offset balance higher for longer. On a $4,000/month spending pattern, this strategy adds roughly $2,000-$3,000 to your average offset balance, saving approximately $130-$200/year. **4. Emergency fund in the offset:** Instead of keeping your emergency fund in a savings account earning 4-5% (taxable), park it in your offset. The effective return equals your mortgage rate (6-7%) and it is tax-free. A $30,000 emergency fund in the offset saves approximately $1,950/year in interest. **5. Multiple offset accounts:** Some lenders allow multiple offset accounts linked to the same mortgage. Use one for everyday spending, one for bills, one for savings goals. This helps with budgeting while keeping all your money working against the mortgage. **6. Consider the annual fee:** Offset accounts typically require a package loan with a $300-$400 annual fee. If your offset balance is consistently under $5,000-$7,000, the fee may exceed the interest saving. In that case, a basic home loan with redraw and no annual fee might be cheaper.
Which option should you choose?
Here is a decision framework based on your situation: **Choose an offset account if:** - You own or plan to own an investment property (essential for tax deductibility) - You keep a significant cash balance ($20,000+) - You want full flexibility to access your money via a transaction account - You might convert your home to an investment property in the future - You value the security of knowing the bank cannot restrict access to your funds **Choose a redraw facility if:** - Your home is owner-occupied and will remain so - You want to avoid the annual package fee ($300-$400/year) - Your savings balance is modest (under $10,000) - You prefer a simple loan structure without additional accounts - You are disciplined and less likely to dip into accessible funds **Choose both if:** - Your lender offers offset at no extra cost (some do) - You want the offset for daily transactions and redraw for longer-term extra payments - You are splitting your loan (fixed + variable) and want offset on the variable portion and redraw on the fixed **The numbers:** On a $600,000 mortgage at 6.5% with $60,000 in savings: - 100% offset account: saves $3,900/year in interest. Minus $395 annual package fee = $3,505 net benefit. - Redraw (no annual fee): saves $3,900/year in interest. Net benefit = $3,900. - But if you later convert to an investment property, the offset approach preserves approximately $3,900/year in tax deductions that redraw does not. The offset account is almost always the better long-term choice for anyone who might ever own an investment property. Use our Mortgage Calculator to compare scenarios and see how much you can save.
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General information and estimates only — not financial, tax, or legal advice. Always verify with a licensed adviser or the ATO.
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