What is a redraw facility and what is an offset account?
Offset accounts and redraw facilities are features that, if used as intended, can help you reduce the interest you pay on your home loan.
An offset account is a transaction account linked to your home loan where the money in it ‘offsets’ what you owe on your mortgage. Say you have $400,000 remaining on your loan but $50,000 in your offset account. Your interest bill will be calculated based on a loan balance of $350,000. In the meantime, you can spend the money in your offset like a normal transaction account. Most offset accounts are ‘100% offset’, which means the entire amount in your account is deducted from your loan balance, but some are only partial.
Redraw facilities, meanwhile, just allow you to ‘redraw’ overpayments you’ve made above the minimum. You might have to make a redraw request and there could be limits to how much you can withdraw in a single sitting or given period. Importantly, the facility itself doesn’t save you interest, but making extra repayments can, and a redraw means prior extra repayments don’t become inaccessible to you.
Here are six key facts to know about redraw facilities and offset accounts if you’re tossing up between the two:
1. How redraw facilities compare to offset accounts
Both offset accounts and redraw facilities:
- Can help reduce the amount of interest you pay on your home loan
- Can help you pay off your loan earlier
- Are more common on variable rate loans
The key differences are:
- An offset account works like a regular transaction account with a card. Whilst it’s linked to your home loan, it’s separate to it, so you can access your money instantly and without restriction.
- A redraw facility isn’t a transaction account but a facility linked to your home loan that lets you withdraw overpayments you’ve made towards your home loan. This can mean they’re less flexible than offset accounts.
2. Loans with offset accounts can be more expensive
While most variable rate home loans come with redraw facilities, those with offset accounts sometimes have higher rates and fees than those without.
Many ‘basic’ home loans—options with low rates and fewer features—don’t include offset accounts. While offset accounts are becoming more widespread, and the gap may be closing, Canstar research shows the average rate on home loans with offset accounts remains higher than on those without.
If you aren’t going to have a significant sum ‘offsetting’ your interest bill, you might be better off saving with a basic product.
Minimum, average rates by offset availability
Minimum | Average | |
|---|---|---|
Loans without | 5.79% p.a. | 6.51% p.a. |
Loans with | 5.84% p.a. | 6.71% p.a. |
Package loans | 5.89% p.a. | 6.48% p.a. |
Source: www.canstar.com.au – 24/08/2026. Based on owner occupier variable loans on Canstar’s database available for a loan amount of $600,000, 80% LVR and principal & interest repayments; excluding introductory, first home buyer only and other special condition loans.
3. Redraw facilities aren’t always unlimited
The main difference between an offset account and a redraw facility is access to your money. You have unencumbered access to money in your offset account, while you usually have to make a request to redraw funds.
Some products have unlimited free redraw, so you can make as many requests as you want. Others might have minimum or maximum redraw amounts, as well as limits to how often you can make a request. Likewise, some lenders have easy-to-use apps and online portals allowing you to redraw funds quickly without hassle, while others may not.
Online redraw requests are usually free, but there could be a small fee if you make a request on paper or over the phone.
4. Redrawn funds may not be tax deductible on investment loans
If you have an investment property loan, redrawn funds and money withdrawn from an offset account may be treated differently for tax purposes.
When you take money out of an offset account, the balance your interest bill is calculated on will increase by however much you remove. Take out $5,000, you’ll suddenly be paying interest on that $5,000. On loans attached to investment properties, that interest still could be tax deductible.
When you redraw funds previously used to pay down your home loan’s balance, however, it’s treated more like a new loan by the ATO, since you’re actually taking money out of your loan account. If you redraw that $5,000 and don’t spend it on something that produces income, you may not be able to claim the interest charged on that amount as a tax deduction.
5. Redraw and offset are more common on variable-rate loans
Both redraw and offset accounts are much more common on variable-rate home loans.
Many fixed-rate products do come with redraw facilities. However, there may be restrictions on how much you can overpay without incurring break costs.
Offset accounts are much less common on fixed-rate products. Even if you already have an offset balance, fixing your loan may mean the offset feature is ‘turned off’ for the fixed period, leaving it to effectively work as a transaction account..
6. What happens to your redraw facility when the loan is paid off?
Funds in your redraw facility will no longer be available once you’ve paid off your home loan, when both your loan balance and the available redraw balance will be zero.
If there’s still money in your offset account once your loan is paid off, it becomes a normal transaction account. You may not be earning much interest though, so that might be the time to explore other options, like a high interest savings account.
Is it better to put money into your offset or a savings account?
If your home loan rate is higher than your savings account rate, you might be better off putting everything you can into your offset.
Say you have $20,000 in savings. In a 30 day period with interest calculated daily, you could earn about $82 in interest if your savings account has a rate of 5% p.a.. If your home loan interest rate is 6% though, putting the money into your offset account could save you nearly $99 on your home loan repayments.
Also, using an offset account doesn’t reduce the size of your repayments, and savings are instead funnelled towards repaying more of your debt than you otherwise would. Because using an offset account can essentially see you making extra repayments, that $99 saved today could see interest accrue on a smaller balance over years to come.
Interest earned from a savings account is also taxable, whereas you aren’t taxed on what you save through your offset account.
