Offset Account vs Redraw Facility

Both offset accounts and redraw facilities are home loan features that reduce the interest you pay. They achieve the same basic goal — lowering your effective loan balance — but they do it in fundamentally different ways.

Offset Account

An offset account is a separate transaction account linked to your home loan. The balance in this account is subtracted from your outstanding loan principal before the lender calculates interest each day.

You use it like any regular bank account — your salary goes in, you pay bills, tap your debit card, set up direct debits and BPAY. The higher your daily balance, the less interest you're charged on your loan. Crucially, your actual loan balance never changes. The lender simply charges you interest on a lower amount.

Redraw Facility

A redraw facility lets you make extra repayments above your minimum scheduled amount, and then withdraw (redraw) those extra funds later if you need them.

When you make extra repayments, the money is applied directly to your loan principal — your loan balance actually decreases. If you redraw, the lender re-advances those funds back to you, and your loan balance increases again. The funds are not sitting in a separate account; they are part of the loan itself.

Most variable-rate home loans in Australia offer both features, but the differences in ownership, access, and tax treatment are significant — particularly if you own an investment property.

The interest savings from both features are mathematically identical for the same balance. If you have $50,000 in an offset account or have made $50,000 in extra repayments sitting in redraw, the reduction in daily interest is exactly the same.

The differences that actually matter are about what happens when you withdraw the money — especially if your loan is for an investment property.

Here's how the mechanics work in practice. Say you have a $600,000 home loan at 6.30% p.a. on a 30-year term with monthly principal & interest repayments.

Without an offset account, the lender calculates daily interest on the full $600,000 balance. Your monthly repayment is approximately $3,719. Over 30 years, you'd pay approximately $738,700 in total interest.

Now, suppose you maintain a consistent $50,000 balance in your offset account from day one. The lender calculates daily interest on $550,000 instead of $600,000. Your scheduled repayment stays the same at $3,719 — but because less of each repayment goes to interest, more goes to paying down the principal. This compounds over time.

The result:

• Total interest saved: approximately $95,400 over the life of the loan
• Loan paid off: approximately 4 years and 2 months earlier
• Total repayments saved: approximately $186,000 (interest savings plus the repayments you no longer need to make)

Your offset balance does not need to stay constant. Interest is calculated daily, so every dollar counts for every day it sits in the account. Your salary landing on payday and gradually being spent throughout the month still saves you interest — even a fluctuating balance helps.

Use our offset calculator to model the exact savings for your specific loan amount, rate, and offset balance.

This is the single most important difference between offset and redraw — and the one most Australians get wrong.

The ATO's fundamental rule is that interest is deductible based on the purpose of the borrowed funds, not the purpose of the property. This principle, established in the ATO's guidance on interest deductions, determines whether your investment loan interest remains fully deductible.

Why Redraw Can Contaminate Your Investment Loan

Say you have a $500,000 investment property loan at 6.30%. Over several years, you make $80,000 in extra repayments, reducing the balance to $420,000.

Later, you redraw that $80,000 to renovate your own home.

Here's the problem: the ATO treats this redraw as a new borrowing of $80,000. The purpose of that $80,000 is now personal — a home renovation — not investment. Your loan balance is back to $500,000, but only $420,000 of it is deductible. The interest on the remaining $80,000 is a personal expense and cannot be claimed as a tax deduction.

This is not a grey area. The ATO's position is clear and consistently applied: the deductibility of interest follows the use of the borrowed funds, and redrawn money is treated as freshly borrowed money.

Why Offset Accounts Avoid This Problem

Now consider the same situation with an offset account. You deposit $80,000 into the offset, reducing the interest charged on your $500,000 investment loan. Later, you withdraw $80,000 from the offset to renovate your home.

The difference? You withdrew your own money from your own transaction account. The loan itself was never touched. It remains at $500,000, and the entire amount was borrowed for investment purposes. The full $500,000 in interest remains tax-deductible.

The loan purpose is unchanged. You simply have less of your own money sitting in offset.

The Dollar Cost of Getting This Wrong

Using the scenario above — $80,000 of contaminated loan at 6.30%:

And that is just on the $80,000. Many investors make multiple redraws over the life of a loan, each one further contaminating the deductible portion and creating a complex split-purpose loan that is a headache at tax time.

If you own or plan to own an investment property, an offset account is almost always the safer choice — even with the annual package fee.

Offset accounts get most of the attention, but redraw is genuinely the better option in some situations. Here are three scenarios where redraw comes out ahead.

Owner-Occupier With No Investment Plans

If you live in your home and have no current or foreseeable investment property, the tax trap described above is irrelevant — owner-occupier loan interest is not tax-deductible anyway. In this case, redraw gives you the same interest savings without the $300–$400/year package fee many lenders charge for an offset account.

Over a 30-year loan, that is $9,000–$12,000 saved in fees alone — money that could go towards extra repayments instead.

A Disciplined Savings Tool

Some borrowers prefer redraw precisely because it creates a psychological barrier to spending. An offset account works like a regular transaction account — your debit card is right there, and it is easy to tap into your savings on impulse.

With redraw, withdrawing funds typically requires a manual online transfer, sometimes with a minimum withdrawal amount ($500–$1,000 at some lenders) or a processing delay. This friction can genuinely help people who know they would otherwise dip into their savings.

Lower-Cost Loan Products

Some lenders offer "basic" or "no-frills" variable loans with a lower interest rate but no offset account. These loans typically include a free redraw facility.

The rate discount — sometimes 0.10% to 0.30% — may outweigh the interest benefit of a smaller offset balance. For example, if your typical offset balance is under $5,000, the interest saving from offset is roughly $315/year at 6.30%. A 0.15% rate discount on a $600,000 loan saves you $900/year. The basic loan wins.

The key question is whether you currently hold — or plan to one day hold — an investment property. If you do, the offset account's tax advantage almost certainly outweighs the fee.

If you are considering fixing your interest rate, be aware that most Australian fixed-rate home loans either do not offer an offset account at all, or only offer a partial offset — typically capped at $10,000 to $50,000.

Why? Banks fund fixed-rate loans differently from variable loans. They lock in their own wholesale funding costs for the fixed term, and a large offset balance effectively gives the borrower a variable-rate benefit that undermines the bank's cost structure. So they limit or remove the offset feature to protect their margin.

The Split Loan Strategy

For borrowers who want rate certainty AND offset benefits, a split loan is the standard approach.

Example: Split a $600,000 loan into $400,000 fixed and $200,000 variable, with the offset account linked to the variable portion. You get repayment certainty on the bulk of the loan while maintaining full offset benefits on the variable portion.

This is especially useful for investment property owners who need to preserve the deductibility of the entire loan — the offset sits on the variable split and avoids the contamination risk of redraw.

Redraw on Fixed Loans

Fixed-rate loans also typically limit extra repayments — commonly capped at $10,000 to $30,000 per year during the fixed period. Exceeding the cap triggers break cost fees, which can be substantial (sometimes tens of thousands of dollars if rates have dropped since you fixed).

Redraw availability on a fixed loan is equally limited. Some lenders do not allow redraw on fixed loans at all until the fixed period expires.

If you are considering a fixed rate, check the offset and redraw terms carefully before signing. The headline rate may look attractive, but the loss of offset benefits or extra repayment flexibility could cost more than you save.

Myth: An offset account earns interest on your savings

An offset account does not earn interest. It reduces the interest charged on your loan. The net financial effect is similar — but the tax treatment is very different.

Interest earned in a savings account is taxable income. Interest saved through an offset account is not taxable — because you never received any income; you simply paid less interest.

At a 37% marginal tax rate plus 2% Medicare levy, a 5.00% savings account nets you 3.05% after tax. A 6.30% offset gives you the full 6.30% benefit — more than double the effective return. You would need a savings account paying over 10.30% to match a 6.30% offset after tax at that marginal rate.

Myth: "100% offset" means unlimited

"100% offset" is a marketing term that means the account offsets your loan dollar-for-dollar — as opposed to a partial offset that might apply only 40% of your balance. It does not mean you can offset more than your loan balance.

If your loan is $400,000 and you have $500,000 in an offset account, only $400,000 of offset benefit applies. The remaining $100,000 sits there earning nothing. Those excess funds would be better placed in a high-interest savings account or invested elsewhere.

Myth: Offset funds are less safe than regular bank deposits

Offset accounts are transaction accounts held with an authorised deposit-taking institution (ADI). They are covered by the Financial Claims Scheme (up to $250,000 per person per ADI), just like any other transaction or savings account.

The money in an offset account is your money in your account. It is not part of the loan and does not belong to the lender. If the bank were to fail, your offset funds are protected the same way any deposit would be.

Myth: Offset and redraw always cost the same

The interest saving is identical — but the total cost may not be. Offset accounts typically come bundled in a "professional package" or "wealth package" that carries a $300–$400/year annual fee. Redraw is almost always free.

For small savings balances, the annual package fee can eat into — or even exceed — the convenience benefit of having an offset instead of redraw. If your typical balance is under $5,000, do the maths before paying for a package.

Choose offset if you...

• Own or plan to own an investment property — the tax protection is worth the fee many times over
• Maintain savings typically above $10,000–$20,000 — the interest benefit exceeds the annual package fee
• Want full transaction account access to your savings — debit card, BPAY, direct debits, transfers
• Are a higher-income earner who benefits from the tax-free nature of interest savings
• Want to keep your loan structure clean for future investment planning

Choose redraw if you...

• Are an owner-occupier with no current or future investment property plans
• Prefer lower fees and a simpler loan product
• Have smaller savings balances (under $10,000) where the fee outweighs the convenience
• Want the psychological friction of not having instant card access to your savings
• Are on a basic or no-frills loan with a rate discount that offsets the lack of an offset account

Consider both

Many Australian home loans — particularly professional or wealth packages from the major banks — offer both an offset account and a redraw facility as part of the same product. You can use the offset for daily transaction banking while also having redraw available for any one-off extra lump sum repayments above your offset balance.

This combination gives you maximum flexibility: everyday savings in offset (preserving tax deductibility if it's an investment loan), with the option to make larger ad-hoc extra repayments that sit in redraw.

Not sure how much an offset would save on your specific loan? Use our offset calculator to model the impact for your loan amount, interest rate, and savings balance.