A redraw facility and an offset account are two of the most common features available on home loans, and both can reduce the amount of interest you pay over the life of your loan to the tune of hundreds of thousands in some cases.
While they might seem similar on the surface, they work in different ways and suit different types of borrowers depending on how they manage their money and what they want from their home loan. Before you start using one, it’s important to ask yourself the question: Which option is right for me?
How does a redraw facility work?
A redraw facility allows you to make extra repayments towards your home loan and access those funds again later if you need them. Any extra money you contribute reduces your outstanding loan balance directly, helping you clear your debt sooner and cutting back your payable interest as a result.
Access to funds varies between lenders, but you’ll usually need to submit a request to take money out of your redraw facility. This can take anywhere between one and three business days when done online, though some banks advertise immediate access in certain situations.
You’ll usually be subject to minimum and maximum redrawn sums, often between $500 and $1,000 at the lower end up to a maximum of everything in your facility bar one full mortgage payment’s worth.
How does an offset account work?
An offset account is a transaction account linked to your home loan. Unlike a redraw facility, which reduces your outstanding balance, the funds in your offset account are deducted when your lender calculates your daily interest. For instance, if you have a $400,000 mortgage and $20,000 in your offset account, you'll only be charged interest on $380,000.
Because the money sits in a separate account, you can access it at any time in the same way you would a regular bank account, whether that's via card, transfer or ATM. There are no minimum withdrawal amounts or request processes to navigate. You’ll be charged a fee for using an offset account, though, to the tune of $10 per month or up to $400 per year in most cases.
Redraw vs offset: key differences
| Redraw facility | Offset account | |
|---|---|---|
| Where funds sit | Inside the loan | Separate, linked transaction account |
| How interest is calculated | On the reduced loan balance | On loan balance minus offset balance |
| Impact on loan balance | Extra repayments reduce it directly until redrawn | Loan balance and repayments unchanged |
| Access to funds | Via redraw, with access subject to lender conditions | Instantly at any time, like a regular bank account |
| Typical fees | Often free, though some lenders charge per redraw | Usually requires a home loan package, with annual or monthly fees |
| Available on variable rate loans | Yes | Yes |
| Available on fixed rate loans | Restricted, check lender terms | Generally unavailable |
Case study: how much could each option save you?
Emma has a $600,000, 30-year variable rate home loan at 5.75% p.a. After 12 months of paying her loan, she inherits $50,000 from a family member who passes away. Before she does anything with the money, she considers whether to store the funds in a redraw facility or offset account. Here are her two options:
Redraw facility
With Emma’s money being pushed into her loan, she’d save almost $176,000 over her mortgage term and clear her debt more than five years ahead of schedule. If she decides to redraw that sum, her money and time savings will go down. By refinancing her loan, she can reduce her repayments (though she’d lose access to the money).
Offset account
Emma deposits the same $50,000 into her linked offset account and doesn’t touch it. Her loan balance remains the same, but interest is calculated on $50,000 less. The overall interest savings are virtually identical at just over $176,500. She doesn’t plan to touch the money, but her access to it is much simpler than a redraw should she need it. However, she’ll have to factor in her annual fee of $350, which adds up to $10,150 overall.
The interest savings are so similar in both scenarios because the effective balance on which interest is charged is the same. The difference lies in how the money is held and accessed. The offset account keeps Emma's $50,000 fully liquid and accessible at any time, while the redraw facility reduces her loan balance directly, with access subject to her lender's conditions.
Whether one option suits Emma more than the other comes down to how likely she is to need those funds and what she plans to do with the property in the future. It’s worth crunching the numbers yourself before diving into your home loan application, which you can do with a standard mortgage payment calculator or an offset calculator.
Which option is better for owner-occupiers: redraw or offset?
Whether one is better than the other for you as an owner-occupier comes down to your preferences as a mortgage payer. The main consideration is how you prefer to manage your money. If you're disciplined with your savings and unlikely to need regular access to your extra repayments, a redraw is generally sufficient and cheaper to maintain.
On the other hand, if you'd rather keep your savings fully accessible without any conditions or processing times, an offset account may be worth the additional cost. Some borrowers also appreciate that an offset account keeps their savings visibly separate from their loan, which can make day-to-day budgeting feel more straightforward.
It's also worth thinking about whether you might want to reduce your minimum repayments at some point. Because extra repayments made through a redraw facility reduce your loan balance directly, refinancing or making a home loan adjustment to reduce your repayments is more straightforward.
Speaking with a mortgage broker can help you work out which structure suits your financial habits and longer-term goals before you commit.
Making the most of the offset
"Think of an offset account purely as your new bank account. Due to the fees typically attached to them, it’s only worth getting one if you keep a minimum amount of funds in your account at all times. If your offset account attracted a $300 annual fee and you hold a 30-year, $500,000 mortgage, you’d need almost $6,000 in your offset just for it to pay itself."
Enjoying the best of both worlds
"When my partner and I took out our mortgage, including an offset account was a must. We moved all our banking over so that our payslips were immediately offsetting the loan. However, when our interest rate dropped after a few months, we decided to keep paying that little bit extra into our redraw in case we decide to refinance down the track."
Which is better for investors or future investors: redraw or offset?
For property investors or owner-occupiers who may convert their home into a rental property down the track, an offset account is generally the better choice. The reason comes down to how the ATO treats interest deductibility on investment loans.
When you make extra repayments into a redraw facility and later withdraw those funds for a non-investment purpose, the ATO may not consider that portion of the loan to be used for income-producing purposes. This can reduce the amount of interest you're able to claim as a tax deduction.
Because funds in an offset account sit separately from the loan and don't reduce the outstanding balance, this complication generally doesn't arise in the same way. If you own an investment property or think there's a chance you might convert your home into one in the future, it's worth speaking with a tax professional before deciding which feature to use.
