Offset Account vs Redraw Facility
Which is right for you?
When you're looking to save money on your home loan, two features often come up: offset accounts and redraw facilities. Both can help you pay less interest over the life of your loan, but they work differently and suit different types of borrowers. Understanding the key differences can help you choose the right option for your situation.
The quick answer
An offset account is a separate transaction account linked to your home loan, where your balance reduces the amount of interest you're charged. A redraw facility lets you access extra repayments you've already made on your loan. Both reduce interest, but they differ in flexibility, access, and cost.
How each one works
Offset Account
A transaction account linked to your home loan. The balance in this account is deducted from your loan balance when calculating interest.
- Funds stay in a separate account
- Instant access like a regular bank account
- Interest calculated daily
- Can use it for everyday banking
Redraw Facility
Allows you to withdraw extra repayments you've made above your minimum loan repayment amount.
- Money goes directly into your loan
- May have processing times for withdrawals
- Reduces your actual loan balance
- Not designed for everyday use
Offset example: You have a $400,000 loan and $50,000 in your offset account. You're only charged interest on $350,000. Your $50,000 stays accessible in the offset account.
Redraw example: You have a $400,000 loan but have paid an extra $50,000 in repayments. Your loan balance is now $350,000. You can redraw that $50,000 if needed (subject to lender terms).
Side-by-side comparison
| Feature | Offset Account | Redraw Facility |
|---|---|---|
| How it works | Separate savings account linked to loan | Access to extra repayments made on loan |
| Access to funds | Instant - anytime via card/online banking | May take 1-3 business days, some restrictions |
| Typical fees | $10-$20/month account fee, or higher loan rate | Often free, or $20-$50 per withdrawal |
| Interest savings | Yes - balance offsets loan daily | Yes - extra repayments reduce loan balance |
| Everyday use | Yes - can use like regular transaction account | No - designed for occasional access only |
| Flexibility | Very high - withdraw and deposit freely | Lower - lender may limit access |
| Loan types | Usually only variable loans | Available on most variable and some fixed |
| Lender control | None - you control the account | Yes - lender can restrict in some situations |
| Tax implications | No interest earned, so no tax on offset balance | May affect tax deductions for investors |
| Best for | Those wanting maximum flexibility and access | Disciplined savers focused on loan payoff |
When to choose an offset account
An offset account is ideal if you:
✓ Want easy access to your savings - You can use your offset like a regular transaction account, with no waiting periods or withdrawal limits.
✓ Have fluctuating income - Freelancers, business owners, or anyone with variable income benefits from being able to park larger sums when they come in and access them easily when needed.
✓ Like to keep savings and debt separate - Some people prefer the psychological benefit of seeing their savings in a separate account rather than absorbed into their loan.
✓ Use it for everyday banking - You can salary sacrifice into your offset account, pay bills from it, and maximize the daily offset benefit.
When to choose a redraw facility
A redraw facility makes more sense if you:
✓ Want to minimize fees - Redraw facilities typically don't have monthly account fees, though some charge per withdrawal.
✓ Are disciplined with money - If you're unlikely to dip into your savings regularly, redraw gives you the same interest benefits without the ongoing costs.
✓ Prefer to see a lower loan balance - Some borrowers like the satisfaction of seeing their loan amount decrease faster.
✓ Don't need instant access - If you're comfortable with a 1-3 day processing time and occasional restrictions, redraw can be a cost-effective option.
The cost factor
Cost is where these two options really differ. Let's break it down:
Offset account costs:
• Monthly fee: Usually $10-$20/month ($120-$240 per year)
• Higher interest rate: Some lenders charge 0.10-0.25% more on loans with offset
• Package fees: Often bundled into premium loan packages ($300-$400/year)
Redraw facility costs:
• Usually included free with your home loan
• Withdrawal fees: Typically $0-$50 per transaction
• Some lenders cap free redraws per year
Cost example: If you keep an average of $30,000 in your offset on a $400,000 loan at 6% interest, you'll save about $1,800/year in interest. If your offset costs $240/year in fees, your net saving is $1,560 - which makes it worthwhile.
With a redraw facility, you'd save the same $1,800 with potentially zero ongoing fees, but you'd sacrifice the convenience and instant access.
Important things to watch out for
Offset account traps
⚠️ Watch Out For
- Paying fees when your balance is too low to justify it
- Higher interest rates that outweigh the benefits
- Partial offset accounts (only 40-60% of balance counts)
- Using multiple offset accounts with fees on each
✓ Smart Moves
- Calculate your breakeven point on fees vs. savings
- Use it as your primary transaction account to maximize benefit
- Ensure it's a 100% offset account
- Review annually to ensure it still makes sense
Redraw facility traps
⚠️ Watch Out For
- Lenders can restrict or remove redraw access in certain circumstances
- Processing delays when you need funds urgently
- Minimum redraw amounts (often $500-$1,000)
- Tax implications for investors claiming interest deductions
✓ Smart Moves
- Keep an emergency fund separate from your redraw
- Understand your lender's redraw terms and conditions
- Check processing times before you need to withdraw
- Consult an accountant if you're an investor
Can you have both?
Some home loans offer both an offset account and a redraw facility. This gives you the best of both worlds - you can use the offset for day-to-day flexibility and make lump sum extra repayments that go into redraw.
However, having both usually means paying for the offset account feature, so make sure you're actually using it enough to justify the cost.
The bottom line
There's no universally "better" option - it depends on your personal situation:
Choose an offset account if: You value flexibility, want instant access to your savings, have fluctuating income, or want to use it for everyday banking. Make sure your savings balance is high enough to justify the fees.
Choose a redraw facility if: You're focused on paying down your loan as quickly as possible, don't need regular access to extra funds, want to minimize fees, and are comfortable with slightly less flexibility.
Not sure? Calculate your potential interest savings based on how much you can typically keep saved, compare it against the fees, and consider how often you'd need to access the funds. A mortgage broker can run the numbers for your specific situation.