Offset Account vs Redraw: Which Is Better for Your Mortgage?
Understand the key differences between offset accounts and redraw facilities, including tax implications for investment properties, accessibility, and which saves you more interest.
How an offset account works
An offset account is a transaction or savings account linked to your home loan. The balance in the offset reduces the principal amount on which interest is calculated. If you have a $500,000 mortgage and $50,000 in your offset account, you only pay interest on $450,000. At a rate of 6.2%, that $50,000 offset saves approximately $3,100 per year in interest — the equivalent of earning 6.2% tax-free on your savings. Offset accounts function like regular bank accounts: you can deposit and withdraw money freely, use a linked debit card for everyday purchases, receive your salary into it, and set up direct debits. The more money you keep in the offset, the less interest you pay. A 100% offset account reduces interest dollar-for-dollar; a partial offset (less common now) only offsets a portion. Most major lenders offer 100% offset accounts, though they may charge a higher interest rate (0.05–0.15% more) or a monthly fee ($10–$15) for the privilege.
How a redraw facility works
A redraw facility allows you to access extra repayments you have already made on your mortgage. If your minimum monthly repayment is $3,200 but you have been paying $3,700, the extra $500 per month accumulates as available redraw. After two years of $500 extra payments, you would have approximately $12,000 available to redraw. The money reduces your loan balance (and therefore your interest charges) in the same way as an offset — you pay interest only on the reduced balance. However, a redraw is functionally different from an offset in important ways. Redraw funds are technically part of your home loan, not a separate account. Accessing the money requires a withdrawal from the loan, which may take 1–3 business days and may have minimum redraw amounts ($500–$2,000 with some lenders). Some lenders restrict the number of free redraws per year. Redraw is usually free or included with basic home loan packages, making it the cheaper option for borrowers who do not need daily access to their funds.
Key differences: accessibility, fees, and flexibility
The practical differences between offset and redraw come down to three factors. Accessibility: offset funds are available instantly via debit card, BPAY, and transfers — identical to a regular bank account. Redraw requires a withdrawal request, which may take hours or days depending on the lender and may require a minimum amount. Fees: offset accounts typically require a professional or premium home loan package ($395/year at most major banks) or carry a slightly higher interest rate. Redraw is usually free with basic home loan products. Flexibility: offset accounts let you deposit and withdraw unlimited times with no restrictions. Redraw may limit the number of free withdrawals or impose minimum amounts. For day-to-day banking — receiving salary, paying bills, managing household spending — an offset account is far more practical. For lump sum savings that you do not plan to touch regularly (a tax refund, bonus, or inheritance), redraw achieves the same interest saving without the package fees.
The investment property tax trap with redraw
This is the most critical difference between offset and redraw, and getting it wrong can cost thousands in lost tax deductions. For investment property loans, the ATO treats offset and redraw very differently. Money in an offset account does not change the loan balance — it merely reduces the interest charged. The full loan remains intact and fully deductible. When you withdraw money from redraw, however, the ATO considers that you have repaid and then re-borrowed the money. The re-borrowed amount's tax deductibility depends on what you use the redrawn funds for — not the original loan purpose. If you redraw $20,000 from your investment property loan to buy a car, that $20,000 portion of the loan is no longer tax-deductible because the redrawn funds were used for a private purpose. This 'mixed purpose' loan creates a permanent tax deduction problem. The rule is simple: never use redraw on an investment property loan for personal expenses. Use an offset account instead, which keeps the loan balance and deductibility completely intact.
Which option saves more interest?
In purely mathematical terms, offset and redraw save exactly the same amount of interest for the same balance. Having $50,000 in an offset or $50,000 in extra repayments available for redraw both reduce your interest calculation by $50,000. The difference is behavioural and practical. Offset accounts tend to result in higher balances because people funnel all their income through them, meaning their full pay sits in the offset for days or weeks before being spent on bills and expenses. Even having an average balance of $5,000–$10,000 higher in an offset (because salary lands there before bills go out) saves $310–$620 per year in interest. Redraw, on the other hand, requires conscious effort to make extra repayments — money that goes in tends to stay in because accessing it is slightly harder. This 'friction' can be beneficial for undisciplined savers. Over a 30-year loan, the compounding effect of either strategy is enormous: $50,000 consistently offset against a $500,000 loan at 6.2% saves approximately $210,000 in interest and cuts 5 years off the loan term.
Fees to watch and hidden costs
Offset accounts are not free. Most major banks require a professional home loan package ($395/year at CBA, $395 at Westpac, $395 at ANZ, $299 at NAB) to access an offset account. Some lenders charge a monthly fee ($10–$15) for the offset feature itself. If your offset balance is consistently low (under $5,000), the fees may exceed the interest saving — in that case, redraw or a basic home loan without an offset is better value. Smaller lenders and online banks sometimes offer offset accounts with no package fees: Macquarie, ING, and Ubank all offer offset accounts on their home loans without a separate package fee, though their interest rates may differ from the big four. When comparing loans, calculate the total annual cost: interest rate multiplied by your loan balance, plus package fees, plus any offset fees, minus the interest saved by your expected offset balance. This total cost comparison is the only way to determine whether an offset loan genuinely saves you money versus a cheaper rate without offset.
Best choice for different situations
Owner-occupier with strong cash flow: choose an offset account. Funnel all income through it, pay bills from it, and maintain the highest possible average balance. The daily interest calculation rewards you for every dollar sitting in the account. Owner-occupier with limited surplus: choose redraw on a basic home loan. You avoid the package fees and still benefit from extra repayments reducing your interest. The slight inconvenience of accessing redraw actually helps prevent you from spending the surplus. Investment property owner: always choose an offset account, never redraw. The tax deductibility protection alone is worth the package fee many times over. Multiple properties: consider a single offset account linked to your owner-occupied loan (which is non-deductible) and keep investment loans on basic packages with no extra repayments. Every dollar in the offset reduces your most expensive (non-deductible) debt while preserving full deductibility on your investment loans. This structure is the optimal debt management strategy recommended by most tax accountants.
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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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