Offset vs redraw, with the numbers
Both features cut your interest by the same amount. The differences are in access, flexibility and tax, and they matter most if your home might one day become an investment property.
General information only. This explains how things work; it isn't advice about your situation. Figures are illustrative.
Offset accounts and redraw facilities are often presented as competing features. On interest alone, they do exactly the same thing. Where they differ is in who controls the money, how easily you can get it back, and how the tax office sees it.
How each works
Offset account: a transaction account linked to your loan. Interest is charged on the loan balance minus the offset balance. Your money stays in your account; the loan balance doesn't change.
Redraw facility: you pay extra into the loan itself, reducing the balance. If you need the money later, you ask the lender to give back the extra you paid in.
The interest saving is identical
Take an illustrative $600,000 loan at 6.0% over 30 years. The repayment is about $3,597 a month.
| Scenario | Total interest | Loan paid off in |
|---|---|---|
| No extra money | about $695,000 | 30 years |
| $50,000 held in offset (or redraw) the whole time | about $493,000 | about 25 years 4 months |
Keeping $50,000 against the loan saves about $3,000 of interest in the first year and roughly $202,000 over the life of the loan, finishing it nearly five years early. The repayment stays the same, so more of each payment goes to principal.
The saving is the same whether the $50,000 sits in an offset or has been paid in as redraw. So the choice comes down to everything else.
Where they differ
| Offset | Redraw | |
|---|---|---|
| Where the money sits | Your transaction account | Inside the loan |
| Access | Instant, by card or transfer | Usually online, but the lender can limit or remove it |
| Visibility | Clearly your savings | Easy to lose track of |
| Typical cost | Often on packaged loans with an annual fee | Usually free on basic loans |
| Tax if the home later becomes an investment | Generally keeps your options open | Can create problems (see below) |
Control
Redraw is the lender's facility, not your account. Lenders can set minimum redraw amounts and daily limits, and the loan contract usually allows them to restrict redraw, for example if you are behind on repayments. Money in an offset account is your deposit.
Discipline
Some people prefer redraw precisely because the money is slightly harder to reach. If having savings visible in an everyday account means you spend them, the small friction of redraw can be worth more than the flexibility of an offset.
Cost
Offset accounts often come with packaged loans that charge an annual fee, sometimes several hundred dollars, and occasionally a slightly higher rate. Compare that cost with the balance you'll realistically keep in the offset. A few thousand dollars won't save enough interest to cover a $395 annual fee; $50,000 easily will.
The tax trap: redraw and future investment properties
This is the point most comparisons miss. For an investment loan, the interest you can claim as a deduction depends on what the borrowed money is used for.
- If you pay extra into your home loan and later redraw it, the tax office treats the redrawn amount as a new borrowing. Its interest is deductible only if the new use is income-producing. Redrawing to fund a holiday or a car makes that part of the loan non-deductible, which mixes the loan and complicates your records.
- If you later move out and rent the home, money you paid in as redraw has already reduced the loan. Redrawing it then doesn't restore the original deductible debt.
- With an offset, the loan balance never changed. If the property becomes an investment, you can move the offset savings elsewhere, and the full original loan remains, with interest that may be deductible.
If there's any chance your home becomes a rental, an offset generally keeps more options open. The details depend on your circumstances, so get advice from a registered tax agent before structuring a loan around them.
A quick way to decide
- Likely to keep a large, steady balance and might rent the home out one day: an offset is usually the stronger structure.
- Small or irregular savings and a basic loan without fees: redraw does the same interest job for free.
- Worried you'll spend visible savings: redraw's friction may suit you, but understand the lender's limits on access.
You can see how a lump sum changes your repayments and interest with the repayment calculator.
This is general information only. It is not personal financial, credit, tax or legal advice and does not take your objectives, financial situation or needs into account. Figures are illustrative. Consider your own circumstances and get advice from a licensed professional before making a decision.