Taking out a home loan is a substantial financial commitment, so most people want to find ways to pay it off faster and reduce the interest they owe. Two popular features that can help are offset accounts and redraw facilities.
At first glance, they seem similar, but they work in different ways. The right choice depends on how you manage your money. This guide breaks down the key differences to decide which suits you best.
Want expert advice? Check out the top 10 list of local mortgage brokers for your area:
“It is important to understand the difference between redraw and offset and work out which product suits you, just be aware that some lenders charge extra for an offset, and you may be paying for something you don’t need”
– Mansour Soltani, Soren Financial
How an Offset Account Works (in Simple Terms)
Let’s say you’ve got a $300,000 home loan and $30,000 in your offset account. Instead of paying interest on the full $300,000, you’re only charged interest on $270,000. The more you keep in your offset, the less interest you’ll pay.
The advantage is that you can still use the money whenever you need it. Got bills to pay? No problem. Need to transfer cash? Go for it. It works just like a normal everyday account, except it’s helping you pay less interest over time.
Types of Offset Accounts
There are two main types of offset accounts:
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100% Offset Account – The full balance in your offset account is deducted from your loan when calculating interest.
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Partial Offset Account – Only a portion of your balance offsets your loan.
It’s worth adding that some lenders let you have separate deposit accounts with multiple offsets. This means you can separate funds for different purposes (for example, you could have one offset account for bills and another for savings).
Why Choose an Offset Account?
An offset account helps you reduce the interest on your home loan while keeping your money easily accessible. Since it works like an everyday transaction or everyday bank account, you can withdraw, transfer, or deposit funds whenever you need to – without the hassle of redrawing.
An offset account might be the way to go if you:
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Want to cut down on interest but still need quick access to your cash. It’s great if you like saving on your home loan without locking your money away.
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Have a decent amount of savings. The more you keep in your offset, the less interest you’ll pay – simple as that.
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Are you an investor looking to manage tax implications? Offset accounts can be helpful for investment properties, as they don’t impact loan deductibility the way redraws might.
What is a Redraw Facility?
A redraw facility lets you take money from the extra repayments you’ve made on your home loan. Unlike an offset account, which sits separately as a transaction from the home loan account itself, a redraw facility is built into your mortgage. Those extra repayments help reduce your loan balance (and the interest you pay), but they’re not locked away forever – you can withdraw them if needed.
How a Redraw Facility Works (in Simple Terms)
Your minimum monthly home loan repayment is $2,000, but you pay $2,500 instead. That extra $500 gets stored in your redraw facility. Over time, these additional repayments reduce your home loan interest-only balance, meaning you pay less interest.
There’s a small catch – you can withdraw extra funds if needed, but it’s not always instant. Some lenders set minimum redraw amounts, charge fees, or take a day or two to process withdrawals. It’s not quite as flexible as an offset account, but it’s excellent for disciplined saving.
Why Choose a Redraw Facility?
A redraw facility helps you pay off your home loan faster while giving you a safety net. Unlike an offset account, where your money is always within arm’s reach, redraw keeps your extra repayments separate – helping you avoid the temptation to dip into them and encouraging long-term savings.
A redraw facility might be a great fit if you:
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Want to pay off your mortgage faster. Every extra dollar you put in goes straight toward reducing your loan balance, which means less interest in the long run.
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Like having a backup fund, while it’s not as flexible as an offset account, you can still access those extra repayments if needed.
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Don’t need daily access to your extra cash. Redrawing could be a smart move if you’d rather keep your savings separate so you’re not tempted to spend them.
For a deeper dive into the pros and cons of a redraw facility, check out our guide here.
Key Differences Between Offset and Redraw
Both offset accounts and redraw facilities help you save on your interest costs, but they work differently when it comes to accessibility, flexibility, and how they impact your loan balance. Here’s how they compare:
Feature | Offset Account | Redraw Facility |
How it works | A separate transaction account linked to your home loan. The balance offsets your loan, reducing interest. | Extra repayments made above the minimum reduce your loan balance and interest, but can be accessed later if needed. |
Access to funds | Instant access via debit card, online banking, or transfers. | Requires a redraw request – may have delays, minimum amounts, or fees. |
Flexibility | Works like a regular account – use it for bills, spending, or saving. | Helps you save by keeping funds separate from everyday spending. |
Loan interest savings | Reduces the amount of interest charged daily. | Extra repayments lower interest over time, helping to pay off the loan faster. |
Fees & restrictions | Some banks charge extra for an offset account. | Some lenders impose redraw fees, limits, or delays. |
Best for | Borrowers who want easy access to savings while reducing interest. | Homeowners focused on paying off their mortgage faster but still want emergency access to extra repayments. |
Pros and Cons of Offset Accounts
Offset accounts offer flexibility and interest savings but come with a few trade-offs. Here’s what you need to know:
Pros
Easy access to your money – Works like a regular bank account, so you can dip into it anytime for bills, emergencies, or that holiday you’ve been eyeing.
Reduces the interest you pay – Every dollar in your offset cuts down the interest charged to your home loan.
Great for investors – Unlike redraw, using an offset doesn’t impact the tax deductibility of loan interest for investment properties.
Cons
This may come with higher fees. Some lenders charge extra for offset accounts, especially on premium loan products.
Spending temptation – Because your money is always accessible, it’s easy to take money from your savings and lose out on long-term interest savings.
It might not be worth it with low balances – If you’re not keeping much money in your offset, the savings might not justify the potential fees.
Pros and Cons of Redraw Facilities
A redraw facility helps you pay off your loan faster while giving you access to extra repayments – but there are some catches.
Pros
Encourages extra repayments – Since the money stays in your home loan rather than a separate account, you’re more likely to leave it alone and save on interest.
Still accessible if needed – You can withdraw extra repayments for emergencies or major expenses (though it’s not always instant).
Fewer fees than an offset account – Some lenders charge fees for redraws, but it’s often a lower-cost option than an offset account.
Cons
Not as flexible – Unlike an offset, you can’t just tap your card or transfer money instantly. Some redraws have minimum amounts, delays, or withdrawal limits.
Could impact tax benefits – If you later turn your home into an investment property, redrawing funds could affect the tax deductibility of loan interest.
Some lenders restrict redraws – Certain home loan products limit how often you can withdraw or charge a fee each time.
Which Option Is Best for You?
There’s no universal “best” choice – it depends on how you manage money and what you need from your loan. Here’s a simple way to decide:
An offset account is the way to go if you want instant access to savings while reducing interest. It works like a regular bank account, so you can withdraw and deposit funds freely. This makes it great for everyday spending, but it also means there’s a temptation to spend your savings. For investors, an offset account is often the better option, too, as redrawing funds can affect the tax deductibility of loan or interest payments.
On the other hand, a redraw facility is better if your priority is paying off your mortgage faster. Since extra repayments stay locked in your loan, you’ll be less likely to spend them. You can withdraw if needed, but some lenders set limits, delays, or fees.
If you’re still unsure, it’s best to speak with a home loan expert (either a mortgage broker or someone at your bank) to help you make the right decision.
Final Thoughts
Offset accounts and redraw facilities can help you save money and manage your home loan balance. However, the right choice depends on your circumstances, financial situation, and loan terms. That’s why it’s always best to consult a professional to help with your decision.
Want advice based on your personal circumstances? Speak with a trusted mortgage broker in your area today:
Frequently Asked Questions (FAQs)
1. Can I have a regular transaction account with an offset account and a redraw facility?
Some will let you have an offset account and redraw facility on the same loan. However, not all lenders offer this, and some may charge extra fees for a full offset account or redraw only, so it’s worth checking the fine print before deciding.
2. Which is better for investment properties – offset or redraw?
Offset accounts are usually the go-to for investment properties because they don’t directly affect your home loan balance, which can have tax benefits. With redraw, pulling out extra repayments might be considered personal use, which could impact tax deductibility. Always chat with a financial advisor before making a call.
3. What happens to funds in an offset account if I refinance?
In most cases, your offset account will be closed when you refinance, and the funds will either be transferred to your new loan or a separate account. If you’re sticking with the loan from the same lender, they might let you keep it – best to double-check.
4. Are there minimum redraw amounts or fees for using a redraw facility?
Yes, some lenders set minimum redraw amounts (like $500 or $1,000) and may charge a fee per withdrawal. Redraws aren’t always instant – some banks take a day or two to process them, so keep that in mind if you need quick access.
5. Can I switch from a redraw facility to an offset account (or vice versa)?
It depends on your lender and the type of home loan. Some allow you to switch, but it might involve refinancing or tweaking your loan terms. Before proceeding, make sure to check for fees, tax implications, and whether the switch actually benefits your financial situation.
MANSOUR SOLTANI
With over two decades of experience in Australia’s real estate sector, Mansour has built a career specialising in the acquisition and sale of investment and commercial properties, spanning major metropolitan hubs and regional areas. As the founder and owner of a finance brokerage firm, he manages a loan portfolio exceeding $100 million while serving a broad range of clients nationwide.
A frequent contributor to money.com.au, Mansour has developed a deep understanding of diverse investment strategies, enabling him to provide valuable, well-informed perspectives on market trends and opportunities.
