Offset Account vs Redraw Facility: Which Saves You More on Your Australian Home Loan?
Compare offset accounts and redraw facilities on Australian home loans. Understand the tax implications, flexibility differences, and which option could save you thousands in interest.
Offset Account vs Redraw Facility: Which Saves You More?
Two of the most powerful home loan features in Australia are offset accounts and redraw facilities. Both can save you thousands in interest over the life of your loan — but they work differently, and choosing the wrong one can have tax consequences, especially for investors.
What Is an Offset Account?
An offset account is a transaction account linked to your home loan. The balance in your offset account is deducted from your loan balance before interest is calculated.
Example:
- Home loan balance: $500,000
- Offset account balance: $50,000
- Interest is calculated on: $450,000
You don't earn interest on the offset account — instead, you avoid paying interest on that portion of your loan. At a 6% rate, $50,000 in offset saves you $3,000 per year in interest.
Types of Offset Accounts
- 100% offset: The full balance offsets your loan (most common with variable rate loans)
- Partial offset: Only a percentage of the balance is offset (less common, usually cheaper loans)
Key Features
- Works like a normal bank account — you can use it for everyday transactions
- Your salary can be deposited directly into it
- Debit card and BPAY access
- Balance fluctuates as you spend and earn
- No tax on "interest earned" because you're reducing interest paid, not earning interest
What Is a Redraw Facility?
A redraw facility lets you access extra repayments you've made on your home loan. If you've paid ahead of your minimum repayments, the difference is available to "redraw" — pull back out of the loan.
Example:
- Minimum repayments to date: $120,000
- Actual repayments made: $145,000
- Available to redraw: $25,000
Key Features
- No separate account — the extra funds sit inside the loan itself
- Reduces your loan balance (and therefore interest) until you redraw
- Typically free or very low-cost
- Some lenders have minimum redraw amounts ($500–$2,000)
- Processing can take 1–3 business days
Head-to-Head Comparison
| Feature | Offset Account | Redraw Facility |
|---|---|---|
| Interest saving | Yes — balance offsets loan | Yes — extra repayments reduce balance |
| Access to funds | Instant (debit card, transfer) | 1–3 days (some lenders instant) |
| Everyday banking | Yes — salary, bills, spending | No — separate action to redraw |
| Monthly fee | Often $8–$15/month | Usually free |
| Available on fixed loans | Rarely | Sometimes (limited) |
| Tax treatment (investors) | Loan balance unchanged — deductible interest preserved | Loan balance reduced — may lose tax deductibility |
| Risk of lender changes | Protected as a bank account | Lender can restrict access |
The Tax Trap: Why Investors Should Care
This is the most important difference and the one most commonly misunderstood.
Investment Property Scenario
If you have an investment property loan and you want to keep your interest tax-deductible:
-
Offset account: Your loan balance stays at the original amount. The offset just reduces the interest calculation. If you later withdraw money from the offset for personal use, your loan balance — and therefore your deductible interest — remains unchanged. ✅
-
Redraw facility: When you make extra repayments, your loan balance actually decreases. If you later redraw that money for personal purposes, the ATO considers that a new borrowing for a personal purpose — and the interest on that portion is no longer tax-deductible. ❌
Bottom line for investors: Use an offset account, not redraw.
This distinction has been confirmed by multiple ATO rulings and is critical for anyone with an investment property loan.
How Much Can You Save?
Let's model a $600,000 loan at 6.0% over 30 years with $40,000 kept in offset/redraw:
| Scenario | Interest Saved Over Loan Life | Time Saved |
|---|---|---|
| No offset or redraw | $0 (baseline) | 0 years |
| $40,000 in offset/redraw | ~$110,000 | ~4 years |
| $80,000 in offset/redraw | ~$195,000 | ~7 years |
| $120,000 in offset/redraw | ~$260,000 | ~9 years |
The savings are substantial — even a modest offset balance makes a significant difference over the life of the loan.
Which One Should You Choose?
Choose an Offset Account If:
- You're a property investor (tax deductibility preservation is critical)
- You use the account for everyday banking (salary deposits, bills)
- You want instant access to your funds
- You can afford the monthly account fee ($8–$15)
- Your loan balance is over $300,000 (the interest savings outweigh the fee)
Choose Redraw If:
- You have a home you live in (owner-occupier — no tax deductibility concern)
- You want to minimise fees
- You're disciplined and won't be tempted to redraw for impulse spending
- Your loan is fixed rate and offset isn't available
- Your savings balance is small (under $10,000 — offset fee may not be worth it)
Consider Both:
Many Australian home loans offer both an offset account and a redraw facility. If your loan has both, use the offset for everyday banking and treat redraw as a backup for extra repayments you don't plan to touch.
Common Mistakes to Avoid
- Investors using redraw instead of offset — this is the #1 tax mistake. Speak to your accountant.
- Not using the offset for salary — deposit your full salary into the offset, then pay bills from it. Every dollar offsets interest from the moment it lands.
- Choosing a loan based on rate alone — a loan 0.1% cheaper but without offset could cost you more overall.
- Ignoring offset fees — if your offset balance is consistently under $5,000, the $10/month fee may not be worth it.
- Assuming all offsets are 100% — check if it's a partial offset before signing up.
Key Takeaways
- Both offset accounts and redraw facilities save you interest by reducing your effective loan balance
- Investors should use offset accounts to preserve tax deductibility
- Owner-occupiers can use either — choose based on fees and how you bank
- Even a small offset balance creates significant savings over a 25–30 year loan
- Always check the comparison rate and factor in offset/redraw fees
Use CREDIGO's free borrowing power calculator to model different scenarios, or connect with a verified mortgage broker to find the right loan structure.
CREDIGO provides general information only. This is not financial advice. Consult a licensed mortgage broker, financial adviser, or tax professional before making decisions about your home loan structure.