With interest rates rising sharply in recent years, the decision between redraw and offset has become crucial for homeowners seeking to reduce their mortgage costs. One in four Australians now use a home loan offset account to hold their savings, with robust adoption among Gen X (30%) and Millennials (29%). You will only pay interest on $450,000 if you have a $500,000 loan balance and a $50,000 offset account, which makes it easy to understand why these features are so popular.
But what exactly is the difference between offset and redraw options? While both help reduce loan interest and repayment time, they work quite differently. While a redraw facility enables you to access additional repayments you’ve made on your home loan, an offset account relates to your loan and offsets your savings against the loan sum. The choice between offset vs redraw often depends on your financial situation—redraw facilities are generally more cost-effective for owner-occupiers, but offset accounts may offer greater tax and flexibility benefits for investors.
This guide examines the key differences between these home loan features, enabling you to understand when each option is most suitable. Whether you’re considering a redraw vs offset mortgage for the first time or reassessing your current setup, we’ll cover the advantages, limitations and practical considerations to guide your decision.
Related Article: Smart Moves: Refinancing Mortgage Home to Cut Costs
Offset vs Redraw: Quick Feature Comparison
Understanding the fundamental differences between offset accounts and redraw facilities helps homeowners make informed financial decisions. These features operate differently, despite serving the same ultimate purpose: reducing your mortgage interest.
What Is It? Account vs Loan Feature
An offset account functions as a separate transaction account linked to your home loan, essentially working like an everyday bank account. On the other hand, a redraw facility is a feature directly linked to your home loan, providing access to additional repayments you’ve made, rather than being a separate account.
Think of an offset account as a parallel financial tool that sits alongside your mortgage; furthermore, your redraw facility operates within the loan itself. With an offset, you maintain two distinct balances – your loan amount and your offset savings. Using redraw means you’re making additional payments directly into your loan, consequently building up a pool of accessible funds.
How It Saves You Money
Both mechanisms reduce interest through similar mathematical principles; nonetheless, they calculate these savings differently:
Offset calculation: If you have a $458,697 mortgage and $76,450 in your offset account, you’ll only pay interest on $382,247. Interest is computed by deducting the amount held in your offset from the outstanding loan total.
Redraw calculation: Extra repayments directly reduce your loan balance, lowering the principal amount on which interest is charged. This creates a pool of funds comprising your additional repayments that sits in your loan account, available for withdrawal if needed.
Although the interest-saving effect may appear identical, the structural differences become significant over time, particularly in terms of tax implications and access flexibility.
Ease of Access and Usage
The accessibility difference represents perhaps the most practical distinction between these options:
- Offset accounts provide instant access to your money through debit cards, ATMs, and online banking – identical to regular transaction accounts. You can withdraw any amount up to your entire account balance without restrictions.
- Redraw facilities typically require transfer requests that may take 1-2 business days to process. Some lenders impose minimum withdrawal amounts (as little as $764.50) or maximum limits (up to $229,348.53) per transaction.
Many offset accounts allow up to 10 linked accounts per loan, enabling separate “buckets” for different savings goals. This structure simplifies day-to-day money management while maintaining interest benefits. Redraw, meanwhile, encourages saving through slightly restricted access, making it harder to spend those extra mortgage payments impulsively.
Pros and Cons of Offset Accounts
Offset accounts offer unique advantages in the redraw vs offset debate, yet they come with certain limitations that borrowers should consider before making their choice.
Pros: Flexibility, Instant Access, Tax Benefits
Offset accounts shine in providing unrestricted access to your money. Unlike redraw facilities, you can deposit and withdraw funds as often as needed without limitations. This accessibility makes offset accounts ideal for managing emergency funds or saving for major purchases.
The tax advantages are equally compelling. Since offset accounts don’t generate interest income (they simply reduce the interest paid on your loan), the money in these accounts isn’t considered taxable income. This benefit is particularly valuable for investors or those with substantial savings.
Additionally, every dollar in your offset account works to reduce your interest payments. If you maintain an AUD 30,579.80 balance in your offset against an AUD 764,495.12 loan, you’ll only pay interest on AUD 733,915.31. Over time, this can significantly shorten your loan term without changing your repayment amount.
A single house loan may be associated with up to six offset accounts from certain lenders and up to 99 from others. This feature allows you to organise funds for different purposes while still offsetting your loan balance.
Cons: Higher Fees, Requires Discipline
The primary drawback of offset accounts is their cost structure. Many lenders charge higher fees for loans with offset accounts, with monthly fees ranging from AUD 15.29 to AUD 45.87. Moreover, interest rates on loans with offset features are typically higher than basic home loan packages.
To make an offset account worthwhile, given these additional costs, you need to maintain a substantial balance. Without sufficient funds, the benefits may not outweigh the higher fees and rates.
Perhaps the most overlooked challenge is the requirement for financial discipline. The easy accessibility that makes offset accounts attractive can also be their weakness. If you regularly withdraw funds from your offset account, you’ll diminish the interest-saving benefits. As one expert notes, “If you’re not disciplined and deplete your account, you’ll end up facing the higher interest rate before you know it”.
Lastly, offset accounts aren’t available with every home loan type. This limitation may restrict your options when searching for the ideal mortgage product in the offset vs redraw comparison.
Pros and Cons of Redraw Facilities
Redraw facilities represent a compelling alternative in the redraw versus offset comparison, offering distinct financial advantages, yet they come with their own set of limitations that borrowers must carefully consider.
Pros: Lower Cost, Encourages Saving
The most immediate benefit of redraw facilities is their cost structure. Fees for loans with redraw facilities are usually cheaper than those for loans with offset accounts. In many situations, having the redraw facility linked to the loan may incur no additional expense. This cost advantage extends to interest rates as well, with redraw facility loans often featuring lower rates compared to offset account options.
Interest savings represent another significant advantage. Every extra repayment reduces your loan balance, resulting in less interest paid over the life of the loan. Given that home loan interest rates are typically higher than those of savings accounts, this approach is financially advantageous.
Redraw facilities effectively encourage disciplined saving habits. Because accessing funds requires a more deliberate action than simply withdrawing from a transaction account, this structure reduces the temptation to spend money that could otherwise be used to repay your loan. As one expert notes: “Consider it as your ‘just in case’ fund, rather than a regular stream of funds”.
Beyond savings, redraw facilities offer practical benefits for managing cash flow. They provide convenient access to extra funds when needed, without relying on high-interest loans or credit cards. This flexibility can help cover unexpected expenses while still contributing to interest savings over time.
Cons: Limited Access, Tax Implications
The primary disadvantage of redraw facilities lies in their accessibility limitations. Unlike offset accounts, redrawing funds is not as straightforward as withdrawing from a transaction account. Some lenders impose restrictions on how many redraws you can perform each year or how much money you can redraw at once. Additionally, some banks charge fees for each redraw transaction.
The tax implications present another significant concern, particularly for property owners with investments. When you deposit extra money into your loan, it reduces the balance, but if you later redraw those funds, it is treated as new borrowing. If redrawn for personal use (such as a holiday or a car), that portion of the loan loses its tax-deductibility. This can substantially impact investors who may later convert their home into an investment property.
Another notable drawback is the potential for lenders to change terms and conditions. A sudden change in policy could result in you losing access to your entire redraw fund. Borrowers should regularly discuss policy terms with their lender to stay informed of any changes.
Choosing Based on Your Financial Habits
Your daily financial habits ultimately determine which mortgage feature best serves your needs in the redraw vs offset comparison. Instead of simply looking at features, examining your own money management style offers a more tailored approach.
Do You Keep a High Savings Buffer?
The size of your savings directly impacts which option delivers better value. For those who consistently maintain substantial cash reserves, offset accounts provide maximum benefit despite their higher fees. In practice, without a sizeable balance, the interest savings may not justify the additional costs of an offset account.
According to mortgage experts, there’s no point in taking out a loan with an offset unless you’re planning to keep a reasonable amount of cash in that account on a regular basis. Conversely, redraw facilities work excellently for those making regular extra repayments who don’t need immediate access to those funds.
Typically, individuals who prefer keeping their savings separate from everyday spending find redraw facilities encourage more disciplined saving habits. The slightly restricted access serves as a psychological barrier against impulsive spending.
Do You Need Frequent Access to Funds?
The frequency with which you access your savings plays a crucial role in this decision. Offset accounts shine for those who require day-to-day transactions and access to an emergency fund. In essence, if you regularly pay bills, make purchases, or withdraw cash from your savings, offset accounts offer superior convenience with debit card access and ATM withdrawals.
Redraw facilities, whilst still providing access, primarily suit those who:
- Make extra loan repayments, but rarely need to access those funds
- Prefer using extra payments strictly for reducing the mortgage principal
- Don’t need frequent withdrawals
Are You Comfortable Managing Multiple Accounts?
Some borrowers thrive with multiple financial “buckets.” Many lenders offer up to nine offset accounts linked to a single home loan, allowing for separate accounts for various purposes, such as savings, bills, and spending. This approach simplifies money management for those comfortable juggling multiple accounts.
Indeed, people who automate bills and payments often prefer the convenience of offset accounts. Meanwhile, those who manually manage their money might find a single redraw facility sufficient, avoiding additional offset account fees.
Can You Use Both Offset and Redraw Together?
Many borrowers are unaware that the decision between redraw and offset isn’t necessarily an either/or choice. Many lenders allow you to have both features simultaneously on eligible loans, offering a comprehensive approach to mortgage management.
How a Split Loan Setup Works
Split loans divide your mortgage into separate portions, typically with both fixed and variable components. The variable portion provides access to features such as offset accounts and redraw facilities, allowing extra repayments without incurring a penalty. This arrangement helps manage risk while maintaining flexibility, ultimately creating a single regular repayment that your lender divides behind the scenes.
First home buyers often prefer a 50/50 split to balance certainty with flexibility, whereas families managing school fees might lean towards fixed portions for stability. Investors frequently favour variable portions to support strategies like debt recycling.
Example: Combining Offset for Access and Redraw for Savings
Consider a practical example: paying an additional AUD 305.80 monthly via your redraw facility accumulates to AUD 3,669.58 yearly in extra payments, reducing your principal faster. Simultaneously, keeping AUD 45,869.71 in your offset account against an AUD 764,495.12 loan means interest is calculated on only AUD 718,625.41. Together, these approaches create significant interest savings.
For maximum benefit, some borrowers deposit their entire salary into their offset account, then use a credit card with a 55-day interest-free period for all spending. At the end of this period, they pay the credit card using offset funds—meanwhile, that money continues to reduce their mortgage interest.
When Using Both Makes Sense
This dual approach works effectively for those wanting to balance accessibility with structured savings. The strategy suits borrowers who:
- Need immediate access to some funds via offset
- Want to build long-term savings through redraw
Importantly, regular review of your loan terms and account balances ensures you optimise both features as circumstances change. This combined approach may require professional advice, particularly for investors concerned about tax implications.
Conclusion – Redraw vs Offset
Choosing between offset accounts and redraw facilities ultimately depends on your financial circumstances, habits, and goals. Both options effectively reduce the interest you pay on your mortgage, albeit through different mechanisms. Owner-occupiers generally benefit from redraw facilities due to lower fees and interest rates, while investors might find offset accounts more advantageous because of their tax benefits.
For those who maintain substantial savings, offset accounts prove worthwhile despite higher costs. Conversely, redraw facilities suit borrowers who make regular extra repayments but rarely need to access those funds. The decision also hinges on whether you require frequent access to your money. Offset accounts provide immediate transactions through debit cards and ATMs, whereas redraw facilities typically involve processing delays and potential withdrawal limits.
The redraw versus offset debate represents more than a simple financial choice – it reflects how you manage money day-to-day. Whether prioritising convenience, tax efficiency, or forced savings, the right option aligns with your unique financial behaviour and long-term property goals. Regardless of your choice, both paths lead toward the same destination: reduced interest payments and a faster route to mortgage freedom.
What’s the main difference between an offset account and a redraw facility?
A redraw facility is a feature directly associated with your loan, giving you access to additional repayments. An offset account, on the other hand, is a distinct transaction account linked to your home loan. Offset accounts offer instant access to funds, whereas redraw facilities typically take 1-2 days to process withdrawals.
Which option is better for reducing mortgage interest?
Both options can effectively reduce mortgage interest. An offset account calculates interest on your loan balance minus the offset balance, while a redraw facility reduces the loan principal directly.
Are there tax implications to consider when choosing between offset and redraw?
Yes, there are tax considerations. Funds in an offset account don’t generate taxable income, which can be beneficial for investors. However, funds redrawn from a redraw facility may lose tax deductibility if used for personal expenses, particularly for investment properties.
Can I have both an offset account and a redraw facility on my home loan?
Many lenders allow borrowers to have both features simultaneously on eligible loans. This can be achieved through a split loan setup, where you can utilise an offset account for accessibility and a redraw facility for long-term savings.
Which option has lower fees and interest rates?
Generally, redraw facilities have lower fees and interest rates compared to offset accounts. Offset accounts often come with higher monthly fees and slightly higher interest rates on the associated loan. However, the benefits of an offset account can outweigh these costs if you maintain a substantial balance.