Offset Account vs Redraw Facility: Which Saves You More?

The short version: An offset account is a regular transaction account that's linked to your home loan. The balance in the offset account is deducted from your home loan balance before interest is calculated.

For example, if you've a $500,000 home loan and $50,000 in your offset account, you only pay interest on $450,000. This saves you interest without actually reducing your loan balance — your offset savings remain fully accessible at all times. A 100% offset account reduces interest dollar-for-dollar, while some lenders offer partial offset accounts that only offset a percentage.

For an owner-occupier with a $500,000 loan at 6.2%, maintaining $50,000 in an offset account saves approximately $3,100 in interest per year and could reduce a 30-year loan term by over four years. The key advantage is liquidity — your money remains available for emergencies or opportunities.

A redraw facility allows you to make extra repayments on your home loan and then withdraw (redraw) those extra payments later if you need them. Unlike an offset account, the extra money is actually applied to your loan balance, reducing the principal and therefore the interest charged.

When you redraw, you're effectively re-borrowing money from your loan. For example, if you've paid an extra $30,000 into your $500,000 loan, your balance shows as $470,000 and you pay interest on that lower amount. If you need the $30,000 back, you can redraw it, and your loan balance increases back to $500,000.

Real talk — Many lenders offer redraw facilities for free, while offset accounts often come with a monthly fee of $10 to $15, making redraw a more cost-effective option for some borrowers.

While both features save you interest, there are important practical and tax differences. With an offset account, your savings remain in a separate account and your loan balance stays unchanged — this provides clearer separation and is simpler for tax purposes if you later convert your home to an investment property.

Redraw funds are technically part of your loan, which can create complications if you want to claim interest deductions later. Offset accounts provide instant access to funds via a debit card or internet banking, while some lenders restrict redraw access or impose minimum redraw amounts and processing times. Offset accounts typically come with a higher annual package fee or interest rate.

Redraw facilities are more commonly available on basic or no-frills home loans. Both features achieve the same interest-saving outcome — the difference lies in accessibility, flexibility, and tax treatment.

The distinction between offset and redraw becomes critical if you plan to convert your owner-occupied home into a rental property in the future. With an offset account, your loan balance remains unchanged at $500,000 throughout, so if you later rent out the property, you can claim interest deductions on the full $500,000 loan.

One thing people miss: With redraw, if you've paid an extra $50,000 into the loan (reducing it to $450,000) and then redraw $50,000 for personal use, the ATO considers the redrawn portion as a new personal borrowing — not deductible against rental income. This means only $450,000 of the loan remains deductible, and the $50,000 redrawn is a separate non-deductible personal loan. This distinction has been confirmed in several ATO rulings and can cost investors thousands in lost deductions each year.

If there's any chance your home might become a rental, use an offset account. Simple as that.

Choose an offset account if you maintain significant cash savings, value instant access to your funds, or might convert your property to an investment in the future. The ongoing fee (typically $10 to $15 per month) is easily justified if you maintain $10,000 or more in the account.

Choose a redraw facility if you want a simple, low-cost way to make extra repayments and are unlikely to need the money back frequently, or if your loan is purely for investment purposes where the tax distinction doesn't apply. Some borrowers use both — an offset account for their regular transaction account and salary deposits, plus making additional lump-sum payments into the loan with redraw available as a backup. Use our Offset Calculator to model how much interest you could save with different offset balances over the life of your loan.