An offset account and a redraw facility both reduce the interest you pay on your home loan by effectively decreasing the principal balance that accrues interest. But they work differently, carry different tax implications, and suit different situations. Here's a clear breakdown.
How They Work
Offset Account
A separate transaction account (with a BSB and account number) linked to your home loan. The balance in the offset reduces the loan principal for interest calculation purposes, but doesn't actually pay down the loan.
Example: $500,000 home loan, $40,000 in offset
- Interest charged on: $460,000
- Interest saved per year: $40,000 x 6.00% = $2,400
You can use the offset like a regular transaction account - receive your salary, pay bills, tap and go. Every dollar in there saves you interest.
Redraw Facility
A feature of your home loan that lets you access extra repayments you've made above the minimum. The extra repayments reduce your loan balance, and you can "redraw" them if needed.
Example: $500,000 home loan, $40,000 in extra repayments available for redraw
- Interest charged on: $460,000
- Interest saved per year: $40,000 x 6.00% = $2,400
The interest saving is mathematically identical. The difference is where the money sits and how it's treated.
Side-by-Side Comparison
| Feature | Offset Account | Redraw Facility |
|---|---|---|
| Interest saving | Yes (on offset balance) | Yes (on extra repayments) |
| Daily transaction use | Yes (like a bank account) | Usually no (withdrawal process) |
| Debit card / card access | Usually yes | Rarely |
| Salary deposits | Yes | Not practical |
| Extra fees | Often ($10-$15/mo or higher rate) | Usually free |
| Minimum withdrawal | No minimum | Sometimes $500+ minimum |
| Tax treatment (investment) | Preserves deductibility | May not preserve deductibility |
| Multiple accounts | Some lenders offer multiple offsets | Single redraw on loan |
| Available on fixed loans? | Rarely | Sometimes (limited) |
The Tax Distinction (Critical for Investors)
This is the most important difference and often misunderstood:
Scenario: Converting Your Home to an Investment Property
With Offset:
- Your $500,000 loan still shows a balance of $500,000
- You had $80,000 in offset, reducing interest but not the loan balance
- When you convert to investment, the full $500,000 loan is deductible
- Your $80,000 remains in your transaction account, available for your new home deposit
With Redraw:
- Your $500,000 loan shows a balance of $420,000 (after $80,000 extra repayments)
- When you convert to investment, only $420,000 is deductible
- If you redraw the $80,000 for your new home deposit, that $80,000 becomes a personal debt (your new PPOR), potentially not deductible
The difference in tax deductibility on $80,000 at a 37% marginal rate (assuming 6.00% interest) could cost you $1,776 per year in lost deductions. Over 10 years, that's nearly $18,000 in additional tax.
This is why financial advisers typically recommend offset accounts for anyone who might convert their home to an investment property in the future.
When Offset Is Better
- You might convert your home to an investment property. The tax treatment of offset is cleaner and preserves loan deductibility.
- You want to use it as your everyday account. Salary in, bills out, and everything in between saves you interest.
- You have a large cash buffer. If you keep $30,000+ in readily available cash, the interest savings from offset will be substantial.
- You want multiple sub-accounts. Some lenders offer multiple offset accounts for budgeting purposes.
When Redraw Is Better
- You want no extra fees. Redraw is almost always free, while offset often comes with a monthly fee or a higher rate.
- Your cash balance is small. If you only keep $5,000-$10,000 available, the interest savings may not cover the offset account fees.
- You want to reduce your loan balance psychologically. Some people prefer seeing their actual loan balance decrease rather than maintaining a separate offset.
- You're on a fixed rate loan. Fixed rate loans rarely offer offset but sometimes offer limited redraw.
The Maths: Is the Offset Fee Worth It?
Many lenders charge a premium for offset access. Let's see if it pays off:
Scenario: $10/month offset fee ($120/year), 6.00% loan rate
| Offset Balance | Annual Interest Saved | Net Benefit After Fee |
|---|---|---|
| $1,000 | $60 | -$60 (not worth it) |
| $2,000 | $120 | $0 (break even) |
| $5,000 | $300 | +$180 |
| $10,000 | $600 | +$480 |
| $30,000 | $1,800 | +$1,680 |
| $50,000 | $3,000 | +$2,880 |
Rule of thumb: If you'll maintain an average offset balance above $2,000, the offset generally pays for itself. Above $10,000, it's a clear win.
Offset, Redraw, or Both?
Both offset and redraw save you interest. The right choice depends on your situation:
- Keeping it simple and avoiding fees? Use redraw.
- Might convert your home to an investment? Use offset. This is strongly recommended.
- Want to use it as your daily spending account? Use offset.
- Only have a small cash buffer? Redraw might make more sense.
If in doubt, choose offset. The flexibility, tax advantages, and daily usability make it the more versatile option for most homeowners.
Related Guides
- Fixed vs Variable Home Loan - decide which loan type suits you
- How to Refinance Your Home Loan - switch for better features or rates
- Best Savings Accounts - compare alternatives for your spare cash
Frequently Asked Questions
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