Offset Account vs Redraw Facility: Key Differences Explained

Overview

Offset accounts and redraw facilities are two of the most popular features offered with Australian home loans. Both can help you reduce interest and pay off your mortgage faster, but they work differently and have distinct implications — particularly for property investors. This guide explains how each works, the key differences, and which may suit your situation.

How an Offset Account Works

An offset account is a transaction account linked to your home loan. The balance in the offset account is deducted from your loan balance when calculating interest, but the loan balance itself does not change.

For example, if you have a $500,000 loan and $50,000 in your offset account, you only pay interest on $450,000. The $50,000 effectively earns you a return equal to your home loan interest rate — and unlike savings account interest, this return is tax-free for owner-occupiers.

Offset accounts function as everyday transaction accounts. You can deposit your salary, pay bills, and use a linked debit card. The higher the balance you maintain, the more interest you save.

Most offset accounts are 100% offset, meaning every dollar in the account reduces the balance on which interest is calculated. Some lenders offer partial offset accounts, which only offset a portion of the balance.

How a Redraw Facility Works

A redraw facility allows you to make extra repayments on your home loan and then withdraw (redraw) those extra funds if needed. The extra repayments directly reduce your loan balance, which reduces the interest charged.

For example, if you have a $500,000 loan and make $50,000 in extra repayments, your loan balance reduces to $450,000 and interest is charged on that lower amount. If you later need the $50,000 back, you can redraw it — but your loan balance increases again to $500,000.

Redraw is not a separate account. It is a feature of the loan itself. Some lenders set minimum redraw amounts or charge fees for redrawing.

Key Differences

Ownership of Funds

• Offset account: Your money sits in a separate bank account that you own. It is your money at all times.
• Redraw facility: Extra repayments become part of the loan. Technically, you are requesting to re-borrow your own extra repayments when you redraw.

Access and Flexibility

• Offset account: Full transaction account functionality — salary deposits, bill payments, card access. Immediate access at all times.
• Redraw facility: Access varies by lender. Some allow instant online redraws; others require applications and have processing times. Minimum redraw amounts may apply.

Tax Implications for Investors

This is the most critical difference for property investors.

• Offset account: The loan balance never changes, so if you later convert the property from an owner-occupied home to an investment property, the full loan balance remains deductible. Your offset funds are simply moved to another account.
• Redraw facility: Extra repayments reduce the loan balance. If you redraw those funds for personal use (such as a holiday or new car), the redrawn portion of the loan is no longer considered to have been used to purchase the investment property. This means the interest on the redrawn amount is not tax-deductible. This is based on the ATO's interpretation of the purpose of borrowed funds.

This distinction is crucial. Many investors have inadvertently lost tax deductions by using redraw for personal purposes after converting a property to an investment.

Cost

• Offset account: Usually available with packaged or professional home loan products, which may charge annual fees of $200 to $400. Some lenders include offset at no extra cost.
• Redraw facility: Often available for free or at low cost, even on basic variable rate loans.

Which Suits You?

Choose an Offset Account If:

• You are a property investor or may convert your home to an investment in future
• You want full flexibility and transaction account functionality
• You maintain a consistently high savings balance
• You are comfortable paying a slightly higher annual fee for the feature

Choose Redraw If:

• You are an owner-occupier with no plans to convert the property to an investment
• You want to reduce interest costs without paying for additional account features
• You make occasional lump sum extra repayments rather than maintaining a large savings balance
• You prefer the simplicity of a single loan account

Use Both

Many home loans offer both features. You can use the offset account for daily transaction banking and salary deposits, while also having redraw available for any lump sum extra repayments.

Practical Tips

• Salary parking: Deposit your salary into the offset account and pay expenses from it. Even parking your income for a few weeks each month reduces interest.
• Keep records: If you are an investor using redraw, keep detailed records of what each redraw was used for, as the ATO may audit the purpose of redrawn funds.
• Compare total cost: A loan with offset may have a slightly higher rate or annual fee. Compare the total cost (interest plus fees) against a basic loan with redraw to see which saves you more.

Use our Mortgage Repayment Calculator to model how extra repayments or offset balances affect your interest costs and loan term.

Calculate repayments: Mortgage Repayment Calculator | Model extra repayments: Extra Repayments Calculator.

Sources: ASIC Moneysmart, ATO — Interest Deductions on Rental Properties, RBA.