Offset accounts and redraw facilities are two of the most valuable features available with Australian home loans, potentially saving you thousands of dollars in interest. However, they work differently and suit different needs. Understanding the distinction is crucial for maximizing your loan's efficiency.

How Offset Accounts Work

An offset account is a transaction account linked to your home loan. The balance in your offset account is offset against your loan balance when calculating interest, reducing the amount of interest you pay. For example, if you have a $500,000 loan and $50,000 in your offset account, you only pay interest on $450,000. The offset account functions as a regular transaction account—you can deposit salary, pay bills, and use a debit card, all while reducing your loan interest. Most offset accounts provide 100% offset, though some cheaper loan products offer partial offset (e.g., 40%-60%).

The beauty of offset accounts is their simplicity and flexibility. Your money sits in what appears to be a regular bank account, accessible anytime via internet banking, ATMs, or debit card. Yet every dollar in that account is simultaneously reducing your mortgage interest. There's no application process to access your money, no waiting periods, and no restrictions on how many times you can deposit or withdraw.

Offset accounts work on daily balances. If you have $30,000 in your offset for 20 days of the month and $50,000 for the remaining 10 days, the calculation reflects these changing balances. This means even temporary deposits (like salary held for a few days before paying bills) reduce your interest. Savvy borrowers time their transactions to maximize offset balances—depositing salary immediately but delaying bill payments until due dates.

The Power of Offset Accounts

The interest savings from offset accounts are substantial. At a 6.24% interest rate, every $10,000 in your offset account saves approximately $624 per year in interest. Over a 30-year loan, maintaining a $50,000 offset balance could save over $90,000 in interest and reduce your loan term by several years. The savings are equivalent to earning interest at your loan rate, but without paying tax on those earnings—a significant advantage for high-income earners.

The tax-free nature of offset savings is particularly valuable. If you're in the 37% marginal tax bracket and have $50,000 in a regular savings account earning 5.00%, you'd earn $2,500 in interest but pay $925 in tax, netting $1,575 after tax. That same $50,000 in an offset account against a 6.24% loan saves $3,120 in interest—completely tax-free. For high-income earners, the tax benefit makes offset accounts even more powerful than high-interest savings accounts.

Offset accounts accelerate loan repayment without committing to higher fixed payments. When you keep surplus funds in offset, you pay less interest, meaning more of each repayment goes toward principal. This creates a snowball effect—the principal reduces faster, which reduces interest charged, which accelerates principal reduction further. Borrowers who consistently maintain healthy offset balances can shave 5-10 years off their loan term without the commitment of formally increasing their repayments.

Redraw Facilities Explained

A redraw facility allows you to access extra repayments you've made on your loan. If you pay more than your minimum required repayment, that surplus builds up and becomes available to redraw. For instance, if your minimum monthly repayment is $3,000 but you pay $3,500, after 12 months you'd have $6,000 available to redraw. Like offset accounts, extra funds reduce your loan balance and the interest charged. However, accessing money via redraw may take 2-3 business days, and some lenders charge redraw fees or limit the number of free redraws per year.

Redraw works by actually reducing your loan balance. When you pay an extra $500 above your minimum, your loan balance drops by that $500, and future interest is calculated on the lower balance. The "redraw" function allows you to withdraw those extra payments later if needed. This differs from offset where your savings remain in a separate account and don't actually reduce the loan balance—they just reduce the interest calculation.

Understanding redraw availability is important. Your available redraw equals the extra payments you've made above minimum required repayments. If you have a $500,000 loan and have paid a total of $520,000 in repayments over time, but the minimum repayments required were only $515,000, you'd have $5,000 available to redraw. The bank calculates this automatically and shows your available redraw in internet banking.

Offset vs Redraw: Which is Better?

Offset accounts generally provide more flexibility and faster access to funds, making them ideal if you need regular access to savings. They're particularly valuable for owner-occupiers building emergency funds while minimizing interest. Redraw facilities may be more suitable if you simply want to save interest and don't need immediate access to funds, or if you're choosing a cheaper loan product without offset availability. For investment properties, use redraw rather than offset to keep all possible interest tax-deductible. Many borrowers use both strategies: offset for emergency funds and transaction banking, and redraw for long-term surplus repayments. Evaluate whether the loan's interest rate premium for offset features (typically 0.10%-0.30% higher) is worth the additional flexibility for your situation.

The tax implications for investment properties are crucial. If you have an offset account on an investment loan and later withdraw those funds for personal use, the interest on your investment loan remains fully deductible. However, if you redraw from an investment loan for personal use, that portion of your loan interest becomes non-deductible. This makes offset accounts strongly preferable for investment loans if you might use the funds for non-investment purposes.

Consider your discipline and behavior. Offset accounts require more discipline as the money sits in an easily accessible account—impulse spending can reduce your savings. Redraw creates a psychological barrier to accessing funds (requiring an online application and 2-3 days wait), which some borrowers find helpful for maintaining savings discipline. Know yourself and choose the structure that supports your financial behaviors.

Cost-benefit analysis matters. If a loan with offset is 0.20% more expensive than one with only redraw, that's $1,000 per year on a $500,000 loan. If you'd typically maintain $30,000 in offset, you'd save $1,872 in interest at 6.24% ($1,872 - $1,000 = $872 net benefit for offset). But if you'd only maintain $10,000 on average, redraw might be cheaper overall. Project your realistic savings patterns to make the right choice.

Multiple offset accounts are available with some lenders, allowing you to separate funds for different purposes (emergency fund, upcoming expenses, savings goals) while offsetting the full combined balance against your loan. This organization can be valuable for budgeting while maximizing interest savings.