Offset accounts and redraw facilities both let spare cash cut the interest on a home loan while keeping the money within reach. On day one they save exactly the same amount. The differences show up later, in how easy the money is to get back, what the lender can change, and what happens at tax time if the home ever becomes a rental.
How each one works
An offset account is a separate transaction account linked to your loan. Interest is charged on the loan balance minus whatever is in the offset. With $50,000 in the offset against a $600,000 loan, interest is charged on $550,000. The money stays in your own account and you can spend it like any other.
A redraw facility lets you make extra repayments that actually reduce the loan, and then take them back out if you need them. With $50,000 of extra repayments, the loan balance itself is $550,000. Getting the money back means asking the lender for a redraw.
Why the saving can be bigger than it looks
On a 6% loan, $50,000 in an offset or redraw saves about $3,000 of interest in the first year. That saving isn't income, so there is no tax on it.
Compare that with a savings account paying 4.5%. The $50,000 earns $2,250, and at a 32% marginal tax rate about $1,530 is left after tax. To match the offset, a savings account would need to pay roughly 8.8% before tax.
Where they differ
| Offset account | Redraw | |
|---|---|---|
| Whose money it is | Yours, in a normal account | Part of the loan once repaid |
| Getting it back | Spend or transfer any time | Request a redraw; the lender may set minimums, fees or limits |
| Can the lender change access? | Rarely | Yes. Lenders can reduce or freeze redraw under the loan terms |
| Fixed-rate loans | Often not available, or only partly | Often limited |
| Costs | Sometimes an account or package fee | Sometimes a redraw fee |
If the home might become a rental
This is the difference that catches people out. Interest on a loan is generally tax deductible only to the extent the borrowed money is used to earn income. If you move out and rent the property, the interest on the loan used to buy it can become deductible.
- With an offset, the loan balance stays at its full amount. Moving the cash out of the offset after you move out leaves a larger deductible loan, and the cash is free for your next home.
- With redraw, extra repayments have already reduced the loan. Taking money back out is generally treated as new borrowing, and whether its interest is deductible depends on what the redrawn money is used for. Redrawing to buy a new home usually doesn't create a deduction.
The tax rules here have detail and exceptions, so a registered tax agent is the right person to check a specific situation with.
Both pay the loan off faster
Minimum repayments are worked out on the full loan, so any interest saved goes straight to paying off principal. Keeping a steady balance in either one shortens the loan without changing the repayment. For how that compares with investing the same money, see pay off the mortgage or invest.
Run your own numbers
Every household is different. MyFinancialFuture lets you model an offset balance against your own loan with your own income, loan and super, month by month, for free and without an account.
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