Offset Account vs Redraw — What's the Difference?
If you've been comparing home loans, you've probably come across both offset accounts and redraw facilities. They sound similar, and they both help you reduce the interest you pay on your loan — but they work in very different ways, and choosing the wrong one for your situation can cost you.
Here's an explanation of both.
What Is an Offset Account?
An offset account is a transaction account linked to your home loan. The balance in that account is offset against your loan balance daily, which reduces the amount of interest you're charged.
Here's a simple example. If you have a $600,000 home loan and $50,000 sitting in your offset account, you'll only be charged interest on $550,000. The $50,000 isn't reducing your loan balance — it's just sitting there working against it every single day.
This is important. Interest on your home loan is calculated daily. You can't make a repayment on your loan every day, but you can keep money in your offset account every day. That means every dollar sitting in your offset is working for you around the clock, not just when your repayment comes out.
What Is a Redraw Facility?
A redraw facility allows you to access extra repayments you've made on your home loan. So if your minimum monthly repayment is $3,500 and you've been paying $4,000, that extra $500 per month builds up in your redraw and you can pull it back out if you need it.
The difference is that with redraw, the money has actually gone into your loan. It's reduced your balance. With an offset, the money sits separately in a linked account and reduces your interest without touching your loan balance.
Why the Offset Account Is Typically More Flexible
The offset account wins on flexibility for most borrowers, for a few reasons.
The money in your offset is yours in the same way your everyday savings are yours. You can access it instantly, just like a bank account. There are no restrictions on how often you access it or how much you take out.
With redraw, some lenders impose limits on how much you can redraw at once, how frequently you can do it, or they may charge a fee. In some cases lenders have the ability to restrict access to redraw during certain economic conditions, which means the money you thought was accessible might not be as available as you assumed.
For investors there's also a tax consideration. If you redraw funds from an investment loan and use them for personal purposes, it can complicate the deductibility of your interest. An offset account keeps your money cleanly separated, which can be simpler from a tax perspective. Always speak to your accountant about your specific situation.
Getting the Most Out of Your Offset Account
The offset account is only as useful as the amount you keep in it. Here's how to make it work as hard as possible.
Get your salary deposited directly into your offset. This is the single biggest thing most people can do. The moment your pay lands in your offset, it starts reducing the interest on your loan. Even if that money gets spent throughout the month on bills, groceries and everyday life, every day it sits in the account is a day you're paying less interest. Over the life of a loan, this adds up to a significant saving.
Let's put some rough numbers around it. If you have a $600,000 loan at 6% interest and you keep an average of $10,000 in your offset throughout the year, you'd save around $600 in interest in that year alone. Keep $30,000 in there and that saving grows to around $1,800 per year. Over a 30 year loan, the compounding effect of consistently keeping money in your offset can save you tens of thousands of dollars and cut years off your loan term.
Use your offset as your main transaction account. Rather than keeping your savings in a separate account earning modest interest, keep it in your offset instead. You're effectively earning your home loan interest rate on every dollar you hold there, which is almost always higher than what a savings account pays.
Keep as much as possible in there for as long as possible. Even money you're saving for something else — a holiday, a renovation, an emergency buffer — is better sitting in your offset in the meantime. It will be there when you need it, and it will be working against your loan while it waits.
Multiple Offset Accounts
Here's something a lot of people don't know. Some lenders allow you to have multiple offset accounts linked to the one home loan. This is genuinely useful because it lets you organise your money into separate buckets without losing any of the interest benefit.
For example, you might have:
A bills account where you set aside a regular amount each month to cover electricity, insurance, rates and subscriptions. The money sits ready to go, and it's offsetting your loan until the bills come out.
A holiday or savings account where you're putting away money for a trip or a big purchase. Again, it's working against your loan the whole time it's there.
A tax account if you're self employed or have investment income. Setting aside money for tax throughout the year is good practice, and keeping it in an offset account in the meantime means it's reducing your interest while it waits to be paid to the ATO. It's money that's going to leave anyway — you might as well put it to work first.
Not all lenders offer multiple offset accounts, which is one of the reasons loan features matter just as much as the interest rate when you're choosing a home loan. A slightly lower rate with no offset, or a single offset, might cost you more in the long run than a slightly higher rate with a full featured offset facility.
So Which One Should You Choose?
For most owner occupiers who want flexibility and want to make their everyday money work harder, an offset account is the better option.
For borrowers who are very disciplined about making extra repayments and don't need to access that money, a redraw facility can work just as well and sometimes comes with a lower rate or fewer fees.
For investors, the offset account is generally preferred because of the cleaner separation between your loan funds and your personal funds, which can simplify things at tax time.
The honest answer is that the right choice depends on your situation, your loan structure, and what you're trying to achieve. That's worth a conversation before you commit to a loan.
Talk to Us
If you want to understand how an offset account could work for your loan, or you're trying to decide between two home loans with different features, we can help you work through the numbers.
